THE BULL MARKET REPORT for February 6, 2017

by Todd Shaver | Feb 5, 2017 | Weekly Newsletter 7pm Sunday

The Week Ahead
“US Stocks Rise On Banks” was the front page of the paper going into the weekend. This highlights continued optimism about the prospects for the economy under the new administration. Specifically, at the moment, the rolling-back of Dodd-Frank is front and center. Can the momentum continue? Will new policies lead to real results? These are questions yet to be answered. But there is certainly a widespread optimism good things can happen.

This week we provide some insights on our latest thinking for Amazon, Facebook, Apple, Google, Athenahealth, Visa, and Blackstone Group.

Highlights From The Past Week
Trump signs order to roll-back Dodd-Frank. President Trump signed an executive order to begin rolling-back Dodd-Frank. The legislation was put in place after the Financial Crisis to crack down on the banking system and help protect the consumer. The Financial sector traded up on the news. Among the targets are rules that protect against predatory lenders, force brokers to lower fees for retirees, and ban proprietary trading. While it will take a while to fully roll back the financial regulations, Wall Street is likely already preparing for a big push into more aggressive business practices. And this latter point is why the market rallies in spite of what many in this country call chaos in the White House. Let’s give it some time. Remember, the checks and balances built into the Constitution may just begin to take effect over the coming months and years.

Japan set to make huge investment in the United States. They are calling it the "Appease Trump" proposal. Japan is putting together a package it says could generate 700,000 U.S. jobs. The five-part package, to be unveiled when Prime Minister Shinzo Abe visits Trump on Friday in Washington, encompasses investments in infrastructure projects such as high-speed trains and cyber security. Apparently, Abe wants to be sure Trump doesn't blow up at Japan again as he did earlier this week when he accused it of devaluing its currency, which hurt Japan’s yen and government bond yields.

Military tensions rise. While there were some hopes President Trump would demilitarize US presence in the Middle East, they are quickly getting dashed with every passing day. Following Trump's announcement last week that he would implement "safe zones" in Syria which would boost US troop presence in the region, US officials announced Friday they had moved a Navy destroyer - the USS Cole, which in 2000 was infamously attacked by terrorists while on dock in Yemen's Aden harbor - off the coast of Yemen to protect waterways from Houthi militia aligned with Iran. Tensions with Iran increased further on Friday when the U.S. Treasury Department announced sanctions on 13 people and 12 entities.

BMR Companies and Commentary

Amazon (AMZN: $810, -3% for the week)

Amazon traded lower on earnings results. The spending outlook took the shine off profit in the holiday quarter that beat analysts’ estimates. Net income was $750 million, or $1.54 a share versus analyst estimates for profit of $1.36 a share. We are happy to see the company bring profits higher but the Street didn’t feel quite the same.

Amazon will spend big in the coming months on warehouses, movies, gadgets and growth into India, renewing investor concerns that CEO Jeff Bezos cares more about generating revenue far in the future than turning a profit now. The company will double-down on its delivery system that gets products quickly into the hands of its customers. It will keep investing in original movies and shows to encourage people to buy Amazon Prime memberships, which makes them loyal shoppers. It will enhance its hot-selling Echo voice-activated personal assistant to gain a presence in homes.* And it will keep pushing into India, which it sees as a vast frontier for e- commerce growth.
*We at The Bull Market Report have one here at home and we love it.  We get most of our music from Alexa and query Wikipedia through her probably 10 times a day.

All these initiatives will crimp profits. Operating income in the current quarter will be $250 million to $900 million, less than a year ago even though revenue is forecast to increase as much as 23% to $36 billion. “When you see revenue go up and earnings go down, it spooks people,” said a Wall Street analyst. “It’s called negative leverage and the Street hates it.”

Some Street Ratings on Amazon:
2/3/2017      Wedbush    Reiterated Outperform    $900.00
2/3/2017      FBN Securities    Boost Price Target    Buy    $925.00
2/3/2017      J P Morgan Chase    Price Target    Buy    $945.00
2/3/2017      Jefferies Group     Set Price Target    Buy    $975.00
2/3/2017      Macquarie    Set Price Target    Buy    $895.00
2/3/2017      Atlantic Securities    Set Price Target    Buy    $960.00
2/3/2017      Stifel Nicolaus    Boost Price Target    Buy    $912.00
2/3/2017      Cantor Fitzgerald    Price Target    Buy    $965.00
2/3/2017      Credit Suisse      Price Target    Buy    $900.00
2/3/2017      RBC Capital Mkts      Price Target    Buy    $900.00
2/3/2017      Mizuho        Price Target        $905.00
2/3/2017      Evercore ISI    Price Target        $970.00
2/3/2017      Morgan Stanley    Price Target        $900.00
2/1/2017      Piper Jaffray     Reiterated Rating        $900.00

Amazon posted a 55% rise in fourth-quarter profit. But shares of the online retailer dropped in after-hours trading as the company's total sales fell short of analyst expectations. Again, for the quarter, profits rose to $750 million, or $1.54 a share, from $480 million, or $1.00 per share, a year earlier. Sales of $44 billion, up from $36 billion, were below analysts' expectations of $44.7 billion. Sure didn’t miss by much.

BMR Take: Amazon is in growth mode again. We like the long term outlook, but admit heavy investment could bring more near-term volatility. Hold on tight through the turbulence. Amazon is doing all the right things to cause the stock to soar over the long term, including announcing last Monday it would build a $1.5 billion air hub near Cincinnati to accommodate its growing fleet of cargo planes!

More on Amazon:
Amazon has something up its sleeve that may just compete heavily with Google and Facebook.  Online advertising. There’s a category in their financials called Other Revenue which jumped 60% in 2016 to $1.3 billion.  Still small, but obviously growing rapidly. Amazon has been ramping up its online advertising offerings and could one day be a major threat in the industry. The company said: "Our goals in advertising are to be helpful to customers and enhance their shopping and viewing experiences, mostly with targeted recommendations. We think that's a good strategy rather than invasive things that take away from the shopping experience."

They also said "sponsored product" ads were "off to a great start" and a "very effective way" to reach interested customers, adding that the company was working on some video ads as well. "We are balancing customer experience with advertising at all times, and we like the team that's working on it."

Facebook (FB: $131, -1%)

Facebook’s fourth-quarter revenue climbed more than forecast, driven by advertisers’ continued push to reach consumers on mobile phones. The world’s largest social-media company said sales jumped 51% to $8.8 billion, topping the $8.5 billion average analyst projection. Monthly active users on its main social network increased 17% from a year earlier to 1.86 billion people, with 1.2 billion checking daily and 1.7 billion accessing it via their smartphones.

Total revenue of $8.8 billion increased 51% from last year.  The company posted a profit of $4.15 billion, or $1.41 a share, compared to the year-earlier profit of $1.56 billion, or 54 cents a share. We were particularly encouraged with engagement trends whereby improvement was seen across the U.S. and Canada, Europe, and Asia. We like that Instagram now has 400+ million daily active user, adding 100 million new daily users to its impressive tally in just over seven months. We note that WhatsApp now has 1.2 billion monthly active users. We also like the fact that Facebook’s top 100 advertisers represent less than 25% of total revenue, a ratio that decreased from 4Q15, highlighting the company’s increasingly broad and diverse marketplace revenue stream.

Facebook has solidified its position as #2 in the market for mobile advertising, behind only Google. However, it’s still early in the game, as just last year Facebook started selling more marketing spots and added e-commerce tools to Instagram, its photo-sharing app that now has more than 600 million users. Facebook also just recently expanded video advertising, drawing ad dollars that might otherwise have gone to television commercials. So the fight between Facebook and Google over the top spot in advertising is just getting going.

Facebook’s revenue gains had been expected to slow this year because the company has said it won’t keep increasing the percentage of ads shown in users’ News Feeds. That means it’s leaning on other growth areas, like Instagram, as well as new forms of advertising, such as ads in live video. Meanwhile, the company has said it plans to substantially increase its spending on new data centers and engineers.

All in all, “There’s effectively no change in the outlook,” per Chief Financial Officer David Wehner on the earnings call. “We continue to invest aggressively to grow out the business for the long term.”

BMR Take: As Facebook’s influence grows, its users have also started to hold it more accountable for its role in society. Around the U.S. presidential election last year, the company faced an uproar over the use of its social network to spread fake news. Accordingly, poor sentiment has really held the stock back in recent months, but that trend seems to be turning, and turning quickly.

Facebook earnings.  Listen to this:

Revenue (Q4): $8.8 billion vs. $5.8 billion last year
Revenue Change (Y-o-Y): 51%
Earnings (Q4): $4.15 billion vs. $2.27 billion last year
Earnings Growth (Y-o-Y): 83%
The stock set a new all-time high of $135 in after-hours trading after they announced.  The company is now worth almost $400 billion.

So on $8.8 billion of revenue they made $4.15 billion in profit, AFTER TAXES!! That’s 47% after tax.  Insane.

Apple (AAPL: $129, +6%)

Apple will begin assembling iPhones in India by the end of April. The U.S. company has tapped Taiwan’s Wistron Corp to put together its phones in the tech capital of Bangalore. The start of iPhone assembly in India signals a renewed focus on India, perhaps as growth begins to slow in China and other more mature markets. Apple is said to have put forward a long list of demands in negotiations with India’s federal government, including a 15-year tax holiday to import components and equipment.

We highlight the above because we could see President Trump soon having something to say about this. Chief Executive Officer Tim Cook said on the earnings call this week that India is “the place to be.” Apple doesn’t manufacture devices itself, but rather partners with contract manufacturers to handle the capital intensive demands of building factories and hiring staff. Could Trump force Apple’s hand to move all that activity to the US? He expressed interest in doing so during the campaign.

BMR Take: We see a lot of upside for Apple. We just hope the company stays out of the political spotlight. The all-time high of $134 is within sight.  The market cap is now a stone’s throw from $700 billion and they have $246 billion in cash, or $47 per share.  So, of the $129 you pay for a share, $46 or 36% is in cash.  This is unprecedented in the history of Wall Street. We continue to wait for the repatriation push from President Trump – the freeing up of the more than $1.3 trillion of cash being held overseas. This alone could cause a surge in stock prices in the Tech world as well as the overall market.

Blackstone Group (BX: $31, -2%)

President Donald Trump and top U.S. executives had a spirited, balanced discussion about tax issues during a gathering Friday, according to Blackstone’s CEO Steve Schwarzman, who attended the meeting.

“It was spirited intellectually,” Schwarzman said in an interview, adding that differing views were raised about the new administration’s proposed border-adjusted tax, which would put tariffs on imports.

Some companies run by leaders in attendance, including Walmart’s CEO Doug McMillon, have disagreed with Trump and Congressional Republicans on the proposal. “You don’t want to do something that hurts a significant part of the economy, but you want to get benefits from the exports,” Schwarzman said. “Both sides have good points.”

Trump invited 18 executives to the White House to discuss topics ranging from trade and education to women’s roles in the workforce. He called the members “the biggest and best minds in the country.” Trump appointed Schwarzman, who has a net worth of $11 billion, as chairman of the council in December, with the goal of receiving advice on economic growth and job creation from a group of business leaders.

BMR Take: We think Schwarzman’s tight relationship with the President positions Blackstone to be on the winning end of the political change happening. We continue to believe the stock is undervalued. And we can’t help but note a level of optimism in the stock. It appears to us to be “inching up.” Watch this one please.  We believe this stock should be at $40. With Schwarzman's more public profile lately, this just might relate to a higher stock price. But at the same time, beware of getting too close to Trump. The CEO of Uber, Travis Kalanick, has resigned from the Trump Advisory Council after taking lots of flak from investors and customers. You just never know.

Athenahealth (ATHN: $109, -13%)

Athenahealth missed the mark this quarter. Earnings were 42 cents per share, which beat consensus of 27 cents. However, the figure came below the 45 cents posted in the year-ago quarter. Revenues of $288 million missed consensus of $304 million but increased 12% from $257 million a year ago.

The company’s expanding network now connects care across nearly 88,000 providers, nearly 86 million patients*, and over 143,000 offices.  And, as the largest network in Healthcare, its data-driven insights combined with highly efficient and scalable back office work enables doctors to focus on the health of their patients, not paperwork, and expand their market share and get paid more, faster. Management is more confident than ever about its ability to achieve its vision of building the Healthcare internet. Its increasing depth and breadth of product management, technical design and development expertise, combined with increasing bandwidth to focus on its strategy versus the government mandates of recent years, should make Athena even more productive in 2017 as it deepen its services and builds out its unique network.
*We find this number hard to believe, but it came from the company.  We double- and triple-checked.

That said, near-term, the business is tracking below annual targets. The number of new enterprises that went live with the platform was at an all-time high, growing the large customer base. But some doctor and hospital attrition offset some of this and weighed on growth.

Cash was $147 million at the end of 2016 compared with $142 million at 2015 end. Long-term debt was $18 million compared with the 2015-end level of $11 million.

BMR Take: All in all, management maintained 2017 guidance calling for revenue of $1.31 billion and annual bookings of $425 million. The prospects for the company are still bright. We think this week’s sell-off was overdone.

Google (GOOG: $801, -3%)

Planet Labs, a startup that launches small satellites into orbit and sells the imagery, is acquiring the Terra Bella satellite business of Alphabet in a bid to take on larger industry incumbents. In return, Alphabet’s Google is taking a stake in the startup. Google has agreed to purchase satellite images captured by Planet in a multiyear deal.

"It’s a big deal," said Will Marshall, Planet’s chief executive officer. "What this enables us to do is tap into new markets, like certain aspects of the financial markets, insurance and disaster relief." With the deal, Planet will receive seven high-resolution satellites that Terra Bella currently has in orbit. Planet plans to launch an additional six of Terra Bella’s satellites. They are larger than Planet’s existing satellites and offer up to six times better imagery resolution.

Google acquired its satellite division, then called Skybox Imaging, for $500 million in 2014. About 80 Google employees are heading to the startup which has raised more than $180 million. Marshall said the company does not plan to raise additional funds despite the influx of employees and equipment.

BMR Take: Google is at it again. The company is just doing things nobody else is doing. Through innovation, the company is creating its own growth path thereby controlling their own destiny. To re-visit the latest numbers, which were great, Google reported 4Q16 revenue of $26.1 billion, which grew 22% from a year ago and came in about 3% above the consensus. EPS of $8.81 also grew nicely from $7.06 a year ago and was about 7% above the consensus. There was much to like about the quarter - we can't highlight it all, but we will highlight this: Google demonstrated commitment to being an AI-first (Artificial Intelligence) organization with 350+ product launches enabled by AI in 2016. This is just great to see as we believe long term, AI is a mega-trend. All in all, the business is firing on all cylinders, we see compelling long term prospects ahead, and our $900 target is in reach as long as Trump doesn’t derail the stock market. If we hit that target we are raising it to $1000.

Visa (V: $86, +3%)

Visa climbed the most in the Dow Jones Industrial Average on Friday after fiscal first-quarter profit beat analysts’ estimates and the payments network said it expects to meet 2017 revenue forecasts even as a stronger U.S. dollar weighs more heavily on its business.

Revenue will probably increase 16-18% for the full year, the firm reiterated, even accounting for a bigger drag from currency swings. “I feel great about the future of Visa,” CEO Al Kelly told the Street. “We’re on track to meet our financial goals.”

Visa went on to discuss how it completed its roughly $20 billion purchase of Visa Europe, bringing the two firms together after eight years as separate companies. The deal is part of Visa’s strategy to increase its presence in the region and improve global digital offerings to better compete against Mastercard. Getting the event out of the way has been long awaited for.

BMR Take: We are very encouraged to see the stock performance and business results overcome foreign currency risks. The outlook for a stronger dollar could really hurt an international company like Visa. This week was very relieving. For example, foreign exchange effects weighed on growth by 3% this quarter. This figure could easily be greater than 10% in a more tough currency environment.

Upcoming Economic News

TUESDAY, FEBRUARY 7

Trade Balance – December
Time: 8:30 am
Forecast: -$45 billion
The advance report on trade in goods showed solid gains for both imports and exports in December, likely leaving the overall trade deficit little changed. Higher commodity costs and dollar strength helped turn trade into a major drag on last quarter’s GDP, subtracting 1.7% from the real growth rate.

FRIDAY, FEBRUARY 10

Import Price Index – January
Time: 8:30 am
Forecast: 0.2%
Gains in raw materials costs are projected to lift the Import Price Index in January for the fourth time in the past five months. Import prices have not been a major drag on broad price trends of late; the 1.8% yearly rise of the Import Index through December is the quickest pace in four years. While improved prospects for the commodities sector are lifting inflation pressures, renewed dollar strength can moderate the ongoing acceleration in prices.

University of Michigan Consumer Sentiment – February
Preliminary Time: 10:00 am
Forecast: 97.9
Sentiment in the February Michigan survey is expected to dip after ascending to the 13-year high in January. Continued strong jobs gains and quicker income growth can keep confidence above the average level seen during the current recovery. Yet elevated expectations can be curbed a bit as some of the more overly optimistic projections for economic growth may fall short of the mark.

A Letter from a Reader
From: John Tennant [mailto:jotenn@xxxxx.com]
Sent: Sunday, January 29, 2017 5:10 PM
To: Info@BullMarket.com
Subject: OPKO (OPK: $8.61)

Great Forbes article on CEO Frost of Opko.  He just keeps buying his stock too, showing the tenacity cited in the article.  I sure hope he continues his successful ways, as I am also a firm believer in OPKO and just bought more as the stock drifted below $8.50.
Regards,  John

Our thoughts: John was referring to the Forbes article we told you about last week, which blew our mind. Here’s what we said last week:
“Frost is the CEO of Opko and after reading this article, if we at The Bull Market Report invested in our stocks, which we don’t, we would take a lot of our pennies and dollars and invest in this man.  Read for yourself:
https://www.forbes.com/sites/schifrin/2017/01/03/meet-miamis-renaissance-billionaire/#3912053b7306
“The chart below lists all of Frost’s and Opko’s investments.  This list is AMAZING, and we are not exaggerating. We would strongly suggest that some or all of them will pay off in the future.
https://www.forbes.com/sites/schifrin/2017/01/03/the-buffett-of-biotechs-portfolio/#5cd7e7c3a4a3
BMR Take:  We have a Sell Price of $8 on the stock, but we are contemplating buying more if it hits this level.  Stay tuned.  And write us here after you read the article: Info@BullMarket.com.  We would love to hear your thoughts.”

Tesla (TSLA: $251, flat) Morgan Stanley upgraded Tesla to $305. We note that the stock held steady last week after rising from $215 at the end of the year.

A Word From Gary Jefferson
Jefferson Financial Group
First Vice-President, Investments
UBS Financial Services, Inc.

What was GDP growth for 2016?  It began with 0.8% the first quarter; 0.9% the second; 3.5% the third and then – uh oh – only 1.9% in the 4th quarter. That's well short of the consensus forecasts, and results in a very lackluster 2016 number for annual GDP growth of about 1.4%. Fortunately, earnings guidance for 2017 has been much better than what we saw this time last year. This is important because the market looks ahead, not behind. And, disposable personal income (income after taxes) increased 0.3% in December and is up 3.7% from a year ago.

It appears to us that President Trump is very intent on providing a clear and consistent pro-growth agenda. This should pave the way for the market to continue on a move towards a break above 2300 on the S&P 500 Index. The market reacted negatively to what is being described as "uncertainty" following President Trump's orders to curb travel and immigration from Syria, Iraq, Iran and four other countries on the grounds of national security. This type of "noise" will likely be around for the foreseeable future. Regardless of your political perspectives, moments of change can elicit emotional reactions from even the most rational investors.  As always, emotions have no place in investing. Remember that "fear, greed or hope" will get you every time if you let your emotions guide you. That said, we agree with this recent comment from a market maven:  "We believe that now is the time to continue focusing on quality U.S. companies with consistent dividend increases, earnings growth and strong fundamentals - not who is in the White House".

The problem we had the past eight years of getting to at least a 3% GDP rate was not so much the private sector, but rather expanding government largess. Before the Panic of 2008, government transfers – Medicare, Medicaid, Social Security, disability, welfare, food stamps, and unemployment insurance – had climbed to roughly 14% of income, which certainly didn't help prevent the recession. Now they're surged even higher to around 17%. Redistribution hurts growth because it shifts resources away from productive ventures and, among those getting the transfers, weakens work incentives. That's why, for the first time we still have a Plow Horse economy, not a Race Horse economy.

The RACE
In which we plot the prices of four of our favorites. Price of course is irrelevant, but fun to watch. So skip this if you think it is silly.  But sometimes we like to be a little silly at The Bull Market Report

Google - $801, down $22.
Apple - $129, up $7 – but we have to reverse out the 7-1 split from 2014, so we get $903, up $49.  WOW.
Facebook - $130, down 1 (but setting an all-time high Thursday of $135.)  Again, we bring Facebook into the race by multiplying by 7, giving us $910. Facebook had its big run from $115 at the end of the year.
Amazon - $810, down $26.

Results: Google and Amazon fell sharply while Apple had an amazing week and almost caught Facebook. The Race heats up!

UPS Got Hit This Week
This $93 billion market cap company had a rough week. UPS (UPS: $107, down  9%) reported earnings this week. The company reported 4Q16 revenues of $16.9 billion against analysts’ estimates of $17.0 billion. Compared with 4Q15’s revenues of $16.0 billion, the company’s 4Q16 revenues rose 5.5%. On a yearly basis, UPS’s revenue increased to an all-time high of $61 billion in 2016. It was up 4.4% compared with the previous year. UPS Ground business segment saw revenue growth of 7.1% in 4Q16. The Cargo business saw revenue growth fall 12% on a year-over-year basis in 4Q16. During the 2016 peak season, UPS delivered more than 710 million packages around the world, representing a 16% growth compared with 2015. It’s all about e-commerce demand fueling the company’s record package volumes.

Management expects total revenues to grow 5%–7% in 2017, surpassing its historical norms. The company expects e-commerce continued growth to drive revenues.  And they believe they will have the power to increase prices due to their size and strength.

BMR Take: We think the reaction on Wall Street was unwarranted and would look at the 9% price drop as an opportunity to buy the biggest and best delivery service on the planet. 710 million packages delivered last year?  Two and quarter million packages a day for six days a week? This is strength.  This is power. This will drive the company to the $150 billion club within 2-3 three years. And they are paying 3% a year to boot.

Apple Sells a Record Number of iPhones, Beating Expectations as Cash Hits $246 Billion

Apple reported Q1 earnings which not only beat on the top and bottom lines, but also sold a record number of iPhones - 78 million, 2 million more than expected. Earnings of $3.36 were higher than the $3.22 expected, on record revenue of $78.4 billion, above the $77.3 billion expected, and 3.3% higher than a year ago. Revenue in China declined by 12% in the quarter, the 4th consecutive quarterly decline in a row.

--- Gross margin: 38.4%
--- iPhone sales generated $54.4 billion in revenue, 69% of total. This compares to 2.5% in Q1 2008
--- iPhone average selling price: $695
--- Cash now at $246 billion, or $46 per share.
--- App store sales increased 40% YoY in the quarter.

Tim Cook had this to say: “We’re thrilled to report that our holiday quarter results generated Apple’s highest quarterly revenue ever, and broke multiple records along the way. We sold more iPhones than ever before and set all-time revenue records for iPhone, Services, Mac and Apple Watch. Revenue from Services grew strongly over last year, led by record customer activity on the App Store, and we are very excited about the products in our pipeline.”

BMR Take: Now that’s EXACTLY what we thought Cook might say! Seriously, we can see no reason why Apple won’t set a new all-time high sometime soon, as long as the market stays above 20,000 and in fact starts a run towards 21,000.

Twilio
JMP Securities upgrades the company less than a week before it steps up for an important earnings report. One of the most encouraging aspects of JMP Securities turning bullish is the timing of the move.

Twilio (TWLO: $31, up 6%) moved higher this week. The provider of cloud-based communications solutions got a boost after JMP Securities upgraded the stock from Market Perform to Outperform.
They show that developer demand remains strong for Twilio's platform that integrates communication features into existing applications. The Twilio sales team is having a hard time keeping up with all of the inbound leads, a good problem to have when it comes to assessing the dot-com darling's near-term growth potential.

They see a scenario where the stock could hit as high $45 if things go really well for Twilio, a call that would result in a pop of 50% if it plays out.

Twilio reports quarterly results Tuesday. An analyst  firm jumping into the fray at this point implies a high degree of confidence in the call. They could have just waited six days for the report to confirm or debunk his refreshed thesis.

The stock has nearly doubled since going public at $15 seven months ago, but the shares have fallen sharply since peaking north of $70 in late September. JMP Securities says there is a real company here -- and it's hitting all of the right notes. And we at The Bull Market Report couldn’t agree more.

JMP says that developers behind some of the hottest apps -- from Uber to WhatsApp to Airbnb – have hopped on Twilio's real-time communications solutions. There were 34,000 developers on Twilio at the end of September, a 45% surge over the past year. We can’t be more pleased.  Fingers crossed for a strong earnings report on Tuesday.

Letter to the Editor
Todd, Have you ever looked at Verizon (VZ, $49)? Might be good at this level ? Art
From: Art Weed

Our response:
Hi Art –
Yes, down from $54 – looks appealing.  For us though, it is just too big.  Almost $200 billion in market cap.  Not that we don’t like big companies, but Verizon has have never really gone anywhere.  It was $60 in 1999!!  So, not for us.
Thanks for writing and good investing in 2017.

Todd Shaver, Founder and Editor in Chief

GoPro was down 13% to $9.57
Thursday, GoPro (GPRO) said it earned 29 cents a share on sales of $541 million in Q4. GoPro lost $115 million, or 82 cents a share.
GoPro went public in June 2014 at $24 and rose as high as $98 in October 2014 before flaming out. It hit a low of $8.55 on Dec. 15.
We’re glad we got out of this one in July at $13.

The High Yield Report
By Michael Foster
Special to The Bull Market Report

The biggest move this week was in BDCs. The UBS BDC ETC (BDCS: $23, down 2%) was the weakest of all high yield sectors. This sell-off happened for a very good reason: The industry has gotten far overbought. This overbought situation drove us to remove Main Street Capital (MAIN: $36) from our high yield portfolio and as we see growing risks with the sector as a whole. Main Street continues to be an outperformer in the sector, but we don’t like what we’re seeing in broader terms. The sell-off looks like the beginning of profit taking. This may reverse, but the risks seem much higher for this already risky sector. We want to jump back in and get 8% yields from companies that can provide credit to high quality smaller firms, but it’s going to take a while for this trade to become attractive again.

There is one additional concern to consider before jumping into a BDC: Dodd-Frank. BDCs were an unexpected beneficiary of greater banking regulations and “banker paranoia” about regulators breathing down their necks. Did you know the big banks are now spending roughly 25% of earnings on regulatory compliance? The overhead that regulations have put on banks, combined with the fear of public embarrassment, shame, and fines has driven investment and retail bank management to conservatism to a fault. This was most noticeable in 2009-2010 when it was almost impossible to get a mortgage with less than 25% down; the banks were just too paranoid to lend. Things are laxer now, but in the corporate finance world there is still a relative tightness compared to actual credit demand.

That’s where the BDCs came in; they could lend to firms that got turned down by big banks. Fueled by a clever common stock issuance structure that allowed them to expand when deals were possible, this industry exploded to fill demand. This was also happening when Treasury yields were crashing, so there was more investor demand for BDCs to get higher yields.

What if banks come back to lending to the middle market firms that now rely on BDCs? Surely more competition will be a headwind for the industry. That makes us wonder if paying a high premium to NAV for a company in the sector, even one as well managed as Main Street, is wise. And that keeps us firmly on the sidelines.

In the rest of the high yield universe, things were rather quiet. The SPDR Barclays High Yield Bond ETF (JNK: $37) and the Alerian MLP ETF (AMLP: $13.29) ended the week flat. High yield bonds are in a state of uncertainty at the moment as a result of higher interest rates (which is bad) but stronger economic tailwinds (which is good). On the one hand you have investors who worry that companies will struggle to refinance their debt load given higher servicing costs, but on the other hand you have investors who are certain that higher economic growth will translate into better revenues and profit margins that will counteract the servicing costs. And, of course, you have the issue of tax reform, which will also be a boon to American firms if it manifests itself. That could also give firms a lot more room to pay back loans, thus counteracting the higher interest rate issue even further.

What this tells us is that the interest rate hike paranoia of 2013-2015 is over. We’re now seeing capital flows being driven by new considerations and new developments in the market. This is a good thing. It means we can be less obsessed with Janet Yellen & Co. and focus on fund quality over all else.

That brings us to our favored high yield funds. The AGIC Equity and Convertible Income Fund (NIE: $19.26, down -1%) and the PIMCO Dynamic Income Fund (PDI: $29, up 1%) cancelled each other out and ended the week with relative stable pricing. This no action keeps us in a holding pattern and encourages us to stand pat on these two funds.

Finally, a quick word on municipals. Invesco Municipal Trust (VKQ: $12.67, up 1%) and the Nuveen AMT-Free Municipal Credit Income Fund (NVG: $14.59, up 1%) had a solid week of gains, with Invesco continuing to be a strong performer since our recommendation. We don’t see massive capital appreciation in municipal bonds anytime soon, but we think this sector remains overly ignored by investors looking for 7%-9% yields. This is folly when you can get tax-free yields of 4-5% that effectively becomes the same cash in hand as you’d get from 7% taxable yields. More investors will realize this, probably after they file their taxes. That in turn is going to increase demand for municipals. Fears about their tax treatment and again about interest rates are overly priced into these assets. Investors will come back to munis - and we encourage you to be there first.

Good Investing,
Todd Shaver, Founder, CEO and Editor
The Bull Market Report
Since 1998