January 19, 2017
by Todd Shaver | Jan 19, 2017 | Monthly Newsletter Daily 6am if new
The Week Ahead
We are quickly approaching Donald Trump’s Friday inauguration. The event will mark a key inflection point for the markets. After the big rally in stocks and sharp sell-off in bonds following the November election, a plethora of expectations for the future will soon meet the reality of what is possible, as we move into the first 100 days of the President’s term.
This week we provide some insights on our latest thinking for Amazon, Facebook, Google, Netflix, Bristol-Myers Squibb, and Tesoro Petroleum.
Highlights From The Past Week
Recession Watch. History has shown us that a recession has generally occurred during the first term of a new president, especially when following a two-term presidency. Could this be the case this time around? The leading economic indicators (LEIs) are positive, and there has never been a recession without those indicators going negative. CEO confidence is moving up and consumer confidence is exploding, which seemingly points to the likelihood that a recession is not imminent. We are not big believers in patterns, to tell you the truth. So we are leaning towards a continued strong economy and a continued bullish stock market.
There may be a Trump backlash coming though. You know, the one we expected in November after the election. We have talked to a number of our subscribers and many of you are worried about this. Our suggestion is that if you are worried so much so that you are losing sleep, with commissions as low as they are in this century, it is easy enough for you to sell those stocks that make you nervous and look to some of the issues in our High Yield Portfolio. They are generally more stable than other stocks.
However, there is also talk that the Trump presidency could be the best thing Wall Street has seen in a long time. Cutting taxes, bringing back the huge horde of cash overseas, tackling the infrastructure building that needs to be done, etc.; these are all things that could help the economy. Dow 25,000 soon? Oh wait – we haven’t hit 20,000 yet! Stay tuned.
Interest Rates. If the economy continues to grow steadily, the US Treasury 10-year Note could hit 6% in four years, about the time of the next presidential election, up from its current level of 2.4%. Inflation and economic growth are already at levels similar to 2006, when interest rates were at that level.
Stronger dollar. The dollar holds a unique position in the global economy, and a rapidly rising dollar exchange rate has historically caused something somewhere in the global economy to break. Those in emerging markets that have borrowed in dollars face the reality of a liability stream that has become more expensive to repay. Meanwhile, the second largest economy on the planet, China, has informally pegged the yuan to the dollar. A stronger dollar generally means a stronger yuan; a stronger yuan means a less competitive export sector for an economy that is all about trade.
BMR Companies and Commentary
Amazon (AMZN: $817, +3% for the week)
JP Morgan Chase is offering a new, co-branded Visa rewards card through Amazon that offers compelling rewards for both Amazon Prime purchases and all other purchases outside of Amazon. Specifically, the new Chase card offers 5% cash back on all Amazon purchases by eligible Amazon Prime members. This deal marks another win for Amazon deepening their existence in banking.
How about the core business of Retailing? What started out as an online bookseller is now on pace to overtake Macy’s as the world’s largest apparel retailer, a startling development when you remember that e-commerce was once considered an impossible way to sell clothing. Amazon has reportedly recorded record holiday season sales at the same time that traditional department stores, including Macy’s, Sears, and Kohl’s, have reported declines. These companies aren’t adding thousands of new workers like Amazon. To the contrary, Macy’s plans to close 100 stores to improve profitability, and Sears has sold its Craftsman tools line for $900 million to raise cash.
BMR Take: Amazon is currently not far from its all-time high of $844, set in October. There is still the potential for upside for investors here, and the stock could go even further, perhaps passing the $1,000 mark sometime in 2017 or 2018.
Facebook (FB: $128, +4%)
Facebook has underperformed the Nasdaq since the company’s 3Q16 earnings report, due to a number of factors, including concerns about slowing growth, heightened expenses in 2017, and sector rotation out of Technology.
Investors have also cited concern about the headwind from a possible 1Q17 IPO of Snap. As far as the competitive risks of new more exciting Tech IPOs stealing away investors from Facebook, any impact is likely to be temporary and potentially more modest than investors fear. Press reports suggest that Snap (aka Snapchat) was considering an IPO as early as March at a valuation as high as $40 billion. Given that Snap’s IPO will represent the largest tech IPO since Alibaba went public in 2014, some investors have begun to question how the issuance may impact existing public market Tech stocks and in particular its closest comp, Facebook.
BMR Take: Yes, it has underperformed since November, but it has been on a TEAR since the start of the year. Be advised that the upcoming Snapchat IPO will be all over the headlines, but don’t sell your Facebook over this. Facebook’s long term prospects are fantastic. Facebook is fast approaching its all-time high of $133.50 set in October. And fast approaching 2 billion users. The company adds 1 million subscribers every two days. With growth of 35% a year projected for the next two years, the stock is not over-priced.
Netflix (NFLX: $134, +2%)
A big name stock analyst that was short Netflix covered his call this week. It’s nice to see them come join our camp. There is so much to like about Netflix. In fact, the stock hit an all-time high of $133.93 this week!
On the heels of new details about Hulu’s upcoming live TV offering (pricing, content lineup, etc.), Netflix reiterated that it has no plans to make any other meaningful changes to its business model or content strategy, stressing that the simplicity of its offering is a key advantage.
The company has also evaluated the merits of an ad-supported model but continues to believe that focusing on its core business provides the greatest return on investment. Looking back at Netflix’s pricing changes and the un-grandfathering it worked through in 2016, the company feels good about its pricing power and is satisfied with the outlook. They also expect future price increases to be more staggered by country/region rather than by universal global changes.
While Netflix intends to keep pricing relatively consistent globally, in Japan, for instance, it has a lower price for its lowest tier ($5/month) in order to address Netflix’s more limited brand recognition in that market (i.e., to better spur new user adoption).
Netflix now has 50%+ of its content catalog available for downloads on Android and iOS today, and it expects that percent to increase. The company is increasingly self-producing content, which it believes can ultimately be 30%+ cheaper than licensing. Like what began in 3Q16, this will continue to impact cash burn in the near-term given the up-front costs associated with producing content.
BMR Take: Netflix is changing the game for television. We continue to believe they are on a long term path to 2020 EPS of $10 where a 20x PE multiple supports a $200+ valuation.
Google (GOOG: $808, flat)
Speaking of the future of media, Google’s YouTube is just crushing it. We highlight the following data points tracking YouTube through December 2016:
--- YouTube worldwide video views for the top 1000 publishers in December 2016 totaled 70 billion, which was up dramatically from last year. This brings total cumulative views on YouTube for these top publishers to 1.97 trillion – wow. On a trailing three-month basis, total views were 190 billion - these numbers are astronomical! In November 2016 alone, videos uploaded to YouTube generated 147 Billion views, both organic and paid.
--- The total number of subscriptions to the top 1000 YouTube video publishers’ channels was 3.9 billion at the end of December, adding 120 million channel subscriptions in the last month alone, up nearly 70% from this time last year.
--- The total number of videos available on YouTube from these top publishers was 5 million at the end of December, accounting for 19% more content on the platform than in December 2015.
BMR Take: If these numbers don’t describe a healthy business, we don’t know what does. We view Google as a core holding, given: 1) the company remains a top player in the internet space 2) management's track record of execution, 3) the potential to maintain double-digit earnings growth for many years, and 4) attractive valuation.
Tesla (TSLA: $238. Up 4%) has been on a tear. At $182 on December 1st, the stock is up over 30%. The company just opened a showroom in Aspen and the place is packed. I met a friend on the street on Friday and motioned for him to come in. Guess what: He is taking a test drive next week and might buy one of the Model X’s that start at $85,000. 0-60 in 2.9 seconds. Call it a cult, or call it what you will, but this company is real and this company is exciting. With Saturday’s Space X launch of 10 satellites on the Falcon 9 and then landing the rocket on the drone ship in the ocean, Elon Musk’s star is riding high. Musk sent out this Tweet:
Elon Musk @elonmusk
Mission looks good. Started deploying the 10 Iridium satellites. Rocket is stable on the droneship.
BMR Take: We’ve said many times before in these pages that the stock is not for the conservative and that the stock could go to $150 before it goes to $250 due to its volatility, but we will tell you that this stock could go to $400 this year or next. We hereby raise the Price Target from $250 to $290 and raise the Sell Price from $150 to $180.
FAANG Stocks Bite Back Adding $90 Billion In Market Cap Over the Past Two Weeks. Technology stocks have found a cure for whatever was plaguing them during the early stages of the Donald Trump bull market. In especially brisk health is the FAANG block of Facebook, Amazon, Apple, Netflix and Google, which have rallied at 3.8% on average this week, poised for their best performance since October. About $85 billion has been added to their value as investors rotate back into post-election laggards. FAANG stocks were oversold after the election, although there’s likely no real impact from a Trump administration on the highest quality internet names. These five stocks could potentially outperform in 2017, despite pretty clear skepticism among almost all investors, who see a sustained rotation away from growth stocks in the wake of the Trump election. Not us. We are sticking with them. Like glue.
Alphabet (GOOG: $802, up $30)
Apple (AAPL: $119, up $3)
Facebook (FB: $127, up $12)
Amazon (AMZN: $808, up $58)
Netflix (NFLX: $140, up $16)
The Border Tax
Notes at the Margin
Philip K. Verleger, Jr.
Former Director of the Office of Energy Policy
at the United States Department of Treasury
The House of Representatives’ Republican leadership seems set on pushing the plan through despite suggestions from some experts that it is a bad idea. Indeed, their determination to pass the law seems palpable even though major economic players such as James Bullard, president of the Federal Reserve Bank of St. Louis, have admitted publicly that they do not understand the concept.
Still, for the world’s oil industry, it is critical to understand the border tax quickly. Why? Because its passage will likely change oil flows completely. Most US oil producers would have every incentive to sell at home and none to export. Bluntly speaking, for oil the law’s passage is pure mercantilism. Exporters from Mexico, Canada, and the rest of the world could be shut out.
How might this happen? Start with the fact that the “Made in America” price could be 25% higher than world prices. The boost occurs because US producers would pay no tax if they export oil while US importers would pay a 20% tax. This means US producers would receive $50 per barrel if they export. On “paper,” at the margin they would have to pay a 20% tax if they sell to domestic buyers. This means those buyers would have to pay $62.50 per barrel in a $50-per-barrel world for the domestic producer to net $50.
The High Yield Corner
By Michael Foster
Special to The Bull Market Report
It was a quiet week for the markets, with the S&P 500 ending flat with few dramatic days. Donald Trump’s odd press conference, in which the president-elect took a victory lap after his election win but failed to provide clarity on fiscal spending plans or an economic blueprint, caused a brief upset to the markets, but strong results from financial firms on Friday offset the macro worries quickly.
With that in mind, it’s unsurprising that the market was mostly quiet for high yield assets. The UBS BDC ETF (BDCS: $23) was mostly unchanged this week after accounting for its dividend payout, while the SPDR Barclays High Yield Bond ETF (JNK: $37) also saw no major move in any direction. Impatient traders may be frustrated at the lack of volatility, but we are pleased. Junk bonds and BDCs had a tremendous year in 2016, causing many funds and companies in these spaces to become worryingly overvalued. If we don’t see an aggressive run-up in pricing this year, we would be in a better position to hold our positions, add more on short-term dips, and avoid the need to sell overbought assets without viable alternatives for our cash.
This situation is particularly good for the PIMCO Dynamic Income Fund (PDI: $28, down -1%), which fell slightly this week but still has excellent dividend coverage and growth potential. After the fund paid out a massive special dividend last month (which we predicted), the fund is now in a position to accumulate new investment income and pay another big special at the end of this year. We fully expect this to happen, so we want to hold on. There’s only one problem: this fund's premium to its NAV is around 9%, bringing us dangerously close to a point where we would need to offload and choose another, lower-priced bond fund. We’d rather avoid making that trade because there are maybe two funds in the world that can match this fund in terms of yield, portfolio quality, and management acumen. As it stands, we can avoid choosing an alternative to the Pimco fund and enjoy its massive yield.
While things were quiet in BDCs and corporate bonds, there was a bit more action in municipal bonds, although this sleepy asset class is notorious for its low volatility and small moves. The iShares S&P National AMT-Free Municipal Bond Fund (MUB: $109) was flat this week, but our municipal bond picks both outperformed the broader index. Invesco Municipal Trust (VKQ: $12.58) and the Nuveen AMT-Free Fund (NVG: $14.63) both rose over 1% this week thanks to the market finally realizing these funds were underpriced relative to their portfolio quality. It makes little sense for these funds to offer discounts to their NAV, so we expect both to continue to rise in price as municipal bonds strengthen from the blood bath of 2016. For this reason we recommend a solid weighting of your overall portfolio in these bond funds for the foreseeable future.
Our biggest winner this week was AstraZeneca (AZN: $29, up 3%), which has been recovering from the broad panic that President-elect Trump is going to reign in drug prices and pressure Pharmaceutical firms’ profit margins. While a lot of talk before the election from both sides of the aisle pressured Pharma firms, the lack of clarity in Trump’s speech this week was ironically a positive for AstraZeneca. Investors are becoming more certain than ever that promises to reign in drug prices will get watered down heavily before they ever become a legislative reality - and that might never even happen. With that in mind, the big dip that this and other Pharma companies have suffered over the last year is becoming a buying opportunity. We’re pleased to keep AstraZeneca in our high yield portfolio for this very reason.
There is one sector that really took a beating this week: REITs. The SPDR Dow Jones REIT ETF (RWR: $93, down 2%) was the biggest loser of all the indices we track, but our REIT picks outperformed by a substantial margin. Even high-risk and overly volatile Government Properties Trust (GOV: $20, down 1%) saw declines only a fraction of the REIT sector as a whole. This is rare, as Government Properties Trust is notorious for rising more aggressively and falling more precipitously than REITs more broadly.
With one exception, our other REITs fared as well or better. Omega Healthcare Investors (OHI: $32, down 1%) and Care Capital Properties (CCP: $25, down 1%) fell slightly alongside the market, but Digital Realty Trust (DLR: $102) held on to its 2016 gains and ended the week flat. Digital Realty Trust has seen some of the highest capital gains of any of our high yield picks, but we aren’t selling quite yet. As we lap the year since we picked this stock and short-term capital gains become long-term capital gains, we might revisit this stock and consider changing our recommendation to a sell if (and only if) its price rises too fast and its upcoming earnings results shows weak FFO growth. This is something for us to keep our eye on.
Finally, our REIT under-performer is a surprising one: Kimco Realty (KIM: $25, down 3%). Usually a solid and low volatile firm, Kimco slid this week despite getting an upgrade by Raymond James. Kimco also announced that its next dividend will match its last one: 27 cents per share, which is up over 6% from just four months ago. The sell-off may be a result of impatient investors disappointed that we aren’t seeing another rate hike, although Kimco tends to do just one rate hike per year, and they did their last one last quarter. We’re shrugging at this dip, although it does mean Kimco is now flat on a year-over-year basis. Still, we aren’t in Kimco for capital gains, we’re in it for the dividend, so if we see Kimco start to fall further we might recommend doubling down.
All in all, a peaceful week for high yield, which is great for us since we’re getting paid 8% to hold these names. It’s also nice to see high yield resist growing market certainty that an interest rate hike is around the corner. If this trend continues for a few more weeks, we could easily expect high yield to be one of the strongest asset classes of 2017.
This coming week: Watch for a new research report on a fast-growing, powerful company in the virtualization and cloud infrastructure solutions space. Sounds pretty technical, doesn’t it? We’ll make it simple and understandable for you. As always.
Good Investing,
Todd Shaver, Founder, CEO and Editor
The Bull Market Report
January 15, 2017
by Todd Shaver | Jan 15, 2017 | Weekly Newsletter 7pm Sunday
The Week Ahead
We are quickly approaching Donald Trump’s Friday inauguration. The event will mark a key inflection point for the markets. After the big rally in stocks and sharp sell-off in bonds following the November election, a plethora of expectations for the future will soon meet the reality of what is possible, as we move into the first 100 days of the President’s term.
This week we provide some insights on our latest thinking for Amazon, Facebook, Google, Netflix, Bristol-Myers Squibb, and Tesoro Petroleum.
Highlights From The Past Week
Recession Watch. History has shown us that a recession has generally occurred during the first term of a new president, especially when following a two-term presidency. Could this be the case this time around? The leading economic indicators (LEIs) are positive, and there has never been a recession without those indicators going negative. CEO confidence is moving up and consumer confidence is exploding, which seemingly points to the likelihood that a recession is not imminent. We are not big believers in patterns, to tell you the truth. So we are leaning towards a continued strong economy and a continued bullish stock market.
There may be a Trump backlash coming though. You know, the one we expected in November after the election. We have talked to a number of our subscribers and many of you are worried about this. Our suggestion is that if you are worried so much so that you are losing sleep, with commissions as low as they are in this century, it is easy enough for you to sell those stocks that make you nervous and look to some of the issues in our High Yield Portfolio. They are generally more stable than other stocks.
However, there is also talk that the Trump presidency could be the best thing Wall Street has seen in a long time. Cutting taxes, bringing back the huge horde of cash overseas, tackling the infrastructure building that needs to be done, etc.; these are all things that could help the economy. Dow 25,000 soon? Oh wait – we haven’t hit 20,000 yet! Stay tuned.
Interest Rates. If the economy continues to grow steadily, the US Treasury 10-year Note could hit 6% in four years, about the time of the next presidential election, up from its current level of 2.4%. Inflation and economic growth are already at levels similar to 2006, when interest rates were at that level.
Stronger dollar. The dollar holds a unique position in the global economy, and a rapidly rising dollar exchange rate has historically caused something somewhere in the global economy to break. Those in emerging markets that have borrowed in dollars face the reality of a liability stream that has become more expensive to repay. Meanwhile, the second largest economy on the planet, China, has informally pegged the yuan to the dollar. A stronger dollar generally means a stronger yuan; a stronger yuan means a less competitive export sector for an economy that is all about trade.
BMR Companies and Commentary
Amazon (AMZN: $817, +3% for the week)
JP Morgan Chase is offering a new, co-branded Visa rewards card through Amazon that offers compelling rewards for both Amazon Prime purchases and all other purchases outside of Amazon. Specifically, the new Chase card offers 5% cash back on all Amazon purchases by eligible Amazon Prime members. This deal marks another win for Amazon deepening their existence in banking.
How about the core business of Retailing? What started out as an online bookseller is now on pace to overtake Macy’s as the world’s largest apparel retailer, a startling development when you remember that e-commerce was once considered an impossible way to sell clothing. Amazon has reportedly recorded record holiday season sales at the same time that traditional department stores, including Macy’s, Sears, and Kohl’s, have reported declines. These companies aren’t adding thousands of new workers like Amazon. To the contrary, Macy’s plans to close 100 stores to improve profitability, and Sears has sold its Craftsman tools line for $900 million to raise cash.
BMR Take: Amazon is currently not far from its all-time high of $844, set in October. There is still the potential for upside for investors here, and the stock could go even further, perhaps passing the $1,000 mark sometime in 2017 or 2018.
Facebook (FB: $128, +4%)
Facebook has underperformed the Nasdaq since the company’s 3Q16 earnings report, due to a number of factors, including concerns about slowing growth, heightened expenses in 2017, and sector rotation out of Technology.
Investors have also cited concern about the headwind from a possible 1Q17 IPO of Snap. As far as the competitive risks of new more exciting Tech IPOs stealing away investors from Facebook, any impact is likely to be temporary and potentially more modest than investors fear. Press reports suggest that Snap (aka Snapchat) was considering an IPO as early as March at a valuation as high as $40 billion. Given that Snap’s IPO will represent the largest tech IPO since Alibaba went public in 2014, some investors have begun to question how the issuance may impact existing public market Tech stocks and in particular its closest comp, Facebook.
BMR Take: Yes, it has underperformed since November, but it has been on a TEAR since the start of the year. Be advised that the upcoming Snapchat IPO will be all over the headlines, but don’t sell your Facebook over this. Facebook’s long term prospects are fantastic. Facebook is fast approaching its all-time high of $133.50 set in October. And fast approaching 2 billion users. The company adds 1 million subscribers every two days. With growth of 35% a year projected for the next two years, the stock is not over-priced.
Netflix (NFLX: $134, +2%)
A big name stock analyst that was short Netflix covered his call this week. It’s nice to see them come join our camp. There is so much to like about Netflix. In fact, the stock hit an all-time high of $133.93 this week!
On the heels of new details about Hulu’s upcoming live TV offering (pricing, content lineup, etc.), Netflix reiterated that it has no plans to make any other meaningful changes to its business model or content strategy, stressing that the simplicity of its offering is a key advantage.
The company has also evaluated the merits of an ad-supported model but continues to believe that focusing on its core business provides the greatest return on investment. Looking back at Netflix’s pricing changes and the un-grandfathering it worked through in 2016, the company feels good about its pricing power and is satisfied with the outlook. They also expect future price increases to be more staggered by country/region rather than by universal global changes.
While Netflix intends to keep pricing relatively consistent globally, in Japan, for instance, it has a lower price for its lowest tier ($5/month) in order to address Netflix’s more limited brand recognition in that market (i.e., to better spur new user adoption).
Netflix now has 50%+ of its content catalog available for downloads on Android and iOS today, and it expects that percent to increase. The company is increasingly self-producing content, which it believes can ultimately be 30%+ cheaper than licensing. Like what began in 3Q16, this will continue to impact cash burn in the near-term given the up-front costs associated with producing content.
BMR Take: Netflix is changing the game for television. We continue to believe they are on a long term path to 2020 EPS of $10 where a 20x PE multiple supports a $200+ valuation.
Google (GOOG: $808, flat)
Speaking of the future of media, Google’s YouTube is just crushing it. We highlight the following data points tracking YouTube through December 2016:
--- YouTube worldwide video views for the top 1000 publishers in December 2016 totaled 70 billion, which was up dramatically from last year. This brings total cumulative views on YouTube for these top publishers to 1.97 trillion – wow. On a trailing three-month basis, total views were 190 billion - these numbers are astronomical! In November 2016 alone, videos uploaded to YouTube generated 147 Billion views, both organic and paid.
--- The total number of subscriptions to the top 1000 YouTube video publishers’ channels was 3.9 billion at the end of December, adding 120 million channel subscriptions in the last month alone, up nearly 70% from this time last year.
--- The total number of videos available on YouTube from these top publishers was 5 million at the end of December, accounting for 19% more content on the platform than in December 2015.
BMR Take: If these numbers don’t describe a healthy business, we don’t know what does. We view Google as a core holding, given: 1) the company remains a top player in the internet space 2) management's track record of execution, 3) the potential to maintain double-digit earnings growth for many years, and 4) attractive valuation.
Bristol-Myers Squibb (BMY: $56, -6%)
We take Donald Trump’s critical comments on drug pricing and overseas manufacturing in this past week’s press conference as tapping into his two pre-election populists themes of Healthcare affordability and US job creation. While we understand the market’s nervous reaction, there remain considerable political and practical barriers to implementation of the much-feared worst case scenario for the industry. We continue to envisage a robust reimbursement for drugs covered under a medical as opposed to a pharmacy benefit despite the evident uncertainty.
Combative comments on drug pricing and price controls triggered the industry selloff this week. Little here is new as Trump has addressed all the above issues previously, most recently in a TIME interview. However, we believe he will face resistance from within the GOP given 1) minimally anticipated savings as scored by the CBO for Medicare negotiation and 2) the proposed Health Savings Account replacement for Obamacare depends heavily on the very same high deductibles that he has criticized. Separately, border taxes for generic companies would impair cost savings associated with the introduction of multi-source generics.
BMR Take: Bristol along with others in Healthcare are simply an out-of-favor sector for the time being. We think sentiment will change and that now is an opportune time to take a hard look at this exceptional franchise.
Tesoro Corporation (TSO: $80, down 5%)
As the post-election euphoria for US refiners surrounding potential tax cuts begins to fade, talk of a Border Tax Adjustment (BTA) has forced investors to consider its impacts. (See Notes at the Margin, below) Washington policy analysts currently peg the chance of passage as only 40% as the impact would be highly complicated with far too many moving pieces to address with confidence. But the overall impact would be clearly negative for US refiners, driving the US crude price to a material premium, reversing recent global advantages, while increasing domestic product prices and accelerating demand destruction. Tesoro is one of the most exposed companies.
As part of the House GOP tax plan, a Border Tax Adjustment would significantly alter how taxes are calculated, by imposing a 20% tariff on imports, while exempting revenues earned through exports. (The plan has several other key changes including a reduction in the corporate tax rate to 20%, immediate and full deduction of capital investments, the elimination of tax breaks and subsidies, among others). Tax-reform has been a priority for the incoming administration, with a vote expected in the first 100 days. Implementation would likely be a late 2017/early 2018 event but could take effect sooner. The myriad impacts of a BTA will be difficult to gauge until they can be observed in real time due to their interdependency. But the big picture is obvious, refiners like Tesoro import a lot of crude oil, meaning they would face a new more onerous tax burden.
We see reason to add to our positions here. First, as we initially highlighted, the BTA will be extremely complicated to put into place and there is still a good change it never happens. Second, Tesoro is now trading at just .67 times its Net Asset Value, a cheap valuation relative to Phillips 66 which is trading at a premium to NAV. Third, we scrubbed some Wall Street analyst estimates, and do you know what the EPS impact would be of the BTA? About 10%, so the stock has already adjusted for the worst case scenario.
BMR Take: They are undergoing a transformational expansion through the acquisition of Western Refining in the first half of this year as announced in November ($4.1 billion.) We think Tesoro is having a bargain bin sale right now and we see a very compelling risk/reward in the shares at current levels.
Upcoming Economic News
WEDNESDAY, JANUARY 18
Consumer Price Index – December
Time: 8:30 am
Forecast: 0.3% overall, 0.2% core
Higher fuel costs can bring annual growth in the Consumer Price Index above 2% for the first time in over two years. The core CPI had long ago breached that level, as growth in shelter costs in excess of 3% has been a consistent cost pressure for consumers. Alternative measures of core price growth have not run as hot. The Federal Reserve’s preferred core PCE Price Index has not topped 2% yearly growth since 2012.
Industrial Production & Capacity Utilization – December
Time: 9:15 am Forecast: 0.6% industrial production, 75.5% capacity utilization
Undoing declines in Auto and Utility sector output can guide industrial production in December to one of the largest monthly increases of the past two years. Warm weather created three consecutive monthly declines of at least 2% in Utility sector output for the first time on record. December’s unexpectedly sharp gain in auto sales can give a near-term boost to US output.
NAHB Housing Market Index – January
Time: 10:00 am
Forecast: 69
Homebuilder confidence may dip a bit in January after leaping to the 12-year high in December. Yet based on builder sentiment, 2017 is shaping up for strong gains in residential construction. The index measuring expected sales over the next six months rose to 78 last month, far above the historical average of 57.
THURSDAY, JANUARY 19
Housing Starts & Building Permits – December
Time: 8:30 am
Forecast: 1.20 million starts, 1.22 million permits
Housing starts look to surge ahead in December after taking a dive in the previous month. Permits rose 32% annualized in the three months ending November against the prior three months, a strong indicator for near-term building activity. That spike in permits is pointing starts to a much faster pace than the limp 1.4% year-over-year advance to the quarter ending November.
Tesla (TSLA: $238. Up 4%) has been on a tear. At $182 on December 1st, the stock is up over 30%. The company just opened a showroom in Aspen and the place is packed. I met a friend on the street on Friday and motioned for him to come in. Guess what: He is taking a test drive next week and might buy one of the Model X’s that start at $85,000. 0-60 in 2.9 seconds. Call it a cult, or call it what you will, but this company is real and this company is exciting. With Saturday’s Space X launch of 10 satellites on the Falcon 9 and then landing the rocket on the drone ship in the ocean, Elon Musk’s star is riding high. Musk sent out this Tweet:
Elon Musk @elonmusk
Mission looks good. Started deploying the 10 Iridium satellites. Rocket is stable on the droneship.
BMR Take: We’ve said many times before in these pages that the stock is not for the conservative and that the stock could go to $150 before it goes to $250 due to its volatility, but we will tell you that this stock could go to $400 this year or next.
We hereby raise the Price Target from $250 to $290 and raise the Sell Price from $150 to $180.
The RACE:
Facebook (FB: $128 = $896)
Apple (AAPL: $119 = $833)
Amazon: (AMZN: $817)
Google (GOOG: $808)
Facebook is the clear leader for the 2nd week in a row.
Twilio (TWLO: $28, flat) continues to underperform. And we at The Bull Market Report continue to hold out hope for this company. There were some upgrades announced on the Street this past week. On Thursday Oppenheimer made Twilio its Top Pick with a Price Target of $50. Two other firms issued a Buy rating with targets of $35 and $36. And the week before, KeyCorp and Pacific Crest issued an Overweight rating with price targets at $36. All in all, out of 15 firms, there are 8 Hold ratings and 7 Buys with a Consensus Price Target of $40.
BMR Take: We are going to be right about this one - you wait and see! We await the earnings report in early February. If revenues are stellar for the last quarter of 2016, we are going to a very happy newsletter. In this case, as in most cases (see Amazon), it is all about revenues.
The Border Tax
Notes at the Margin
Philip K. Verleger, Jr.
Former Director of the Office of Energy Policy
at the United States Department of Treasury
The House of Representatives’ Republican leadership seems set on pushing the plan through despite suggestions from some experts that it is a bad idea. Indeed, their determination to pass the law seems palpable even though major economic players such as James Bullard, president of the Federal Reserve Bank of St. Louis, have admitted publicly that they do not understand the concept.
Still, for the world’s oil industry, it is critical to understand the border tax quickly. Why? Because its passage will likely change oil flows completely. Most US oil producers would have every incentive to sell at home and none to export. Bluntly speaking, for oil the law’s passage is pure mercantilism. Exporters from Mexico, Canada, and the rest of the world could be shut out.
How might this happen? Start with the fact that the “Made in America” price could be 25% higher than world prices. The boost occurs because US producers would pay no tax if they export oil while US importers would pay a 20% tax. This means US producers would receive $50 per barrel if they export. On “paper,” at the margin they would have to pay a 20% tax if they sell to domestic buyers. This means those buyers would have to pay $62.50 per barrel in a $50-per-barrel world for the domestic producer to net $50.
The High Yield Corner
By Michael Foster
Special to The Bull Market Report
It was a quiet week for the markets, with the S&P 500 ending flat with few dramatic days. Donald Trump’s odd press conference, in which the president-elect took a victory lap after his election win but failed to provide clarity on fiscal spending plans or an economic blueprint, caused a brief upset to the markets, but strong results from financial firms on Friday offset the macro worries quickly.
With that in mind, it’s unsurprising that the market was mostly quiet for high yield assets. The UBS BDC ETF (BDCS: $23) was mostly unchanged this week after accounting for its dividend payout, while the SPDR Barclays High Yield Bond ETF (JNK: $37) also saw no major move in any direction. Impatient traders may be frustrated at the lack of volatility, but we are pleased. Junk bonds and BDCs had a tremendous year in 2016, causing many funds and companies in these spaces to become worryingly overvalued. If we don’t see an aggressive run-up in pricing this year, we would be in a better position to hold our positions, add more on short-term dips, and avoid the need to sell overbought assets without viable alternatives for our cash.
This situation is particularly good for the PIMCO Dynamic Income Fund (PDI: $28, down -1%), which fell slightly this week but still has excellent dividend coverage and growth potential. After the fund paid out a massive special dividend last month (which we predicted), the fund is now in a position to accumulate new investment income and pay another big special at the end of this year. We fully expect this to happen, so we want to hold on. There’s only one problem: this fund's premium to its NAV is around 9%, bringing us dangerously close to a point where we would need to offload and choose another, lower-priced bond fund. We’d rather avoid making that trade because there are maybe two funds in the world that can match this fund in terms of yield, portfolio quality, and management acumen. As it stands, we can avoid choosing an alternative to the Pimco fund and enjoy its massive yield.
While things were quiet in BDCs and corporate bonds, there was a bit more action in municipal bonds, although this sleepy asset class is notorious for its low volatility and small moves. The iShares S&P National AMT-Free Municipal Bond Fund (MUB: $109) was flat this week, but our municipal bond picks both outperformed the broader index. Invesco Municipal Trust (VKQ: $12.58) and the Nuveen AMT-Free Fund (NVG: $14.63) both rose over 1% this week thanks to the market finally realizing these funds were underpriced relative to their portfolio quality. It makes little sense for these funds to offer discounts to their NAV, so we expect both to continue to rise in price as municipal bonds strengthen from the blood bath of 2016. For this reason we recommend a solid weighting of your overall portfolio in these bond funds for the foreseeable future.
Our biggest winner this week was AstraZeneca (AZN: $29, up 3%), which has been recovering from the broad panic that President-elect Trump is going to reign in drug prices and pressure Pharmaceutical firms’ profit margins. While a lot of talk before the election from both sides of the aisle pressured Pharma firms, the lack of clarity in Trump’s speech this week was ironically a positive for Astra-Zeneca. Investors are becoming more certain than ever that promises to reign in drug prices will get watered down heavily before they ever become a legislative reality - and that might never even happen. With that in mind, the big dip that this and other Pharma companies have suffered over the last year is becoming a buying opportunity. We’re pleased to keep Astra-Zeneca in our high yield portfolio for this very reason.
There is one sector that really took a beating this week: REITs. The SPDR Dow Jones REIT ETF (RWR: $93, down 2%) was the biggest loser of all the indices we track, but our REIT picks outperformed by a substantial margin. Even high-risk and overly volatile Government Properties Trust (GOV: $20, down 1%) saw declines only a fraction of the REIT sector as a whole. This is rare, as Government Properties Trust is notorious for rising more aggressively and falling more precipitously than REITs more broadly.
With one exception, our other REITs fared as well or better. Omega Healthcare Investors (OHI: $32, down 1%) and Care Capital Properties (CCP: $25, down 1%) fell slightly alongside the market, but Digital Realty Trust (DLR: $102) held on to its 2016 gains and ended the week flat. Digital Realty Trust has seen some of the highest capital gains of any of our high yield picks, but we aren’t selling quite yet. As we lap the year since we picked this stock and short-term capital gains become long-term capital gains, we might revisit this stock and consider changing our recommendation to a sell if (and only if) its price rises too fast and its upcoming earnings results shows weak FFO growth. This is something for us to keep our eye on.
Finally, our REIT under-performer is a surprising one: Kimco Realty (KIM: $25, down 3%). Usually a solid and low volatile firm, Kimco slid this week despite getting an upgrade by Raymond James. Kimco also announced that its next dividend will match its last one: 27 cents per share, which is up over 6% from just four months ago. The sell-off may be a result of impatient investors disappointed that we aren’t seeing another rate hike, although Kimco tends to do just one rate hike per year, and they did their last one last quarter. We’re shrugging at this dip, although it does mean Kimco is now flat on a year-over-year basis. Still, we aren’t in Kimco for capital gains, we’re in it for the dividend, so if we see Kimco start to fall further we might recommend doubling down.
All in all, a peaceful week for high yield, which is great for us since we’re getting paid 8% to hold these names. It’s also nice to see high yield resist growing market certainty that an interest rate hike is around the corner. If this trend continues for a few more weeks, we could easily expect high yield to be one of the strongest asset classes of 2017.
This coming week: Watch for a new research report on a fast-growing, powerful company in the virtualization and cloud infrastructure solutions space. Sounds pretty technical, doesn’t it? We’ll make it simple and understandable for you. As always.
Good Investing,
Todd Shaver, Founder, CEO and Editor
The Bull Market Report
January 8, 2017
by Todd Shaver | Jan 8, 2017 | Weekly Newsletter 7pm Sunday
The Week Ahead
As the champagne glasses clink in Washington over a record-breaking streak of job growth, the percent of the population employed (aka the labor force participation rate) has slumped. Indeed, the Obama "recovery" has officially been the worst recovery in US history as measured by cumulative real GDP growth. After 32 quarters we are up barely double digits. The standard for an economic recovery is up 15-25%. The great expansions recorded real GDP growth of up 30%, 40%, and even 50% over the cycle. Even worse, we got not just weak results, but added $10 trillion to the national debt in the process. 2017 will be the year of the Orange Swan (aka Trump). Did America pick the right man to lead us back to economic prosperity? Can we get there without geopolitical turmoil?
This week we provide some insights on our latest thinking for Under Armour, Eli Lilly, Microsoft, Alphabet, Apple, Amazon, and Facebook.
Highlights From The Past Week
Tech’s Optimism For Cash Repatriation. Record high-grade US Tech debt issuance has been driven by over $530 billion of offshore cash and investments. The Tech companies can’t get their money back here to the United States so they borrow – at historically low rates. However, the industry’s cautious optimism on a potential 10% cash repatriation centers on gaining access to these funds, which could boost domestic capital spending, M&A, and buybacks. Repatriation would be a windfall for shareholders.
FAANG Stocks Bite Back Adding $85 Billion In Market Cap This Week. Technology stocks have found a cure for whatever was plaguing them during the early stages of the Donald Trump bull market. In especially brisk health is the FAANG block of Facebook, Amazon, Apple, Netflix and Google, which have rallied at 3.8% on average this week, poised for their best performance since October. About $85 billion has been added to their value as investors rotate back into post-election laggards. FAANG stocks were oversold after the election, although there’s likely no real impact from a Trump administration on the highest quality internet names. These five stocks could potentially outperform in 2017, despite pretty clear skepticism among almost all investors, who see a sustained rotation away from growth stocks in the wake of the Trump election. Not us. We are sticking with them. Like glue.
Alphabet (GOOG: $806, up $34)
Apple (AAPL: $118, up $2)
Facebook (FB: $123, up $8)
Amazon (AMZN: $796, up $46)
Netflix (NFLX: $131, up $7)
THE RACE:
[Whereby Apple, Google, Amazon and Facebook are racing with a pure stock price number. Listen – this is not a sophisticated lineup here. It is pure price – nothing to do with percentage increase or market cap increase. We’re just having fun here!]
Converting Apple back to its pre-split price gives us $826, up $14 for the week. Same for Facebook (multiplying by 7) gives us $861, up $56. Wow. Google was up $34 to $801 and Amazon was up $46 to $796.
Clear winner this week? Gotta go with Facebook!
Dismal Year For Brick & Mortar Retail. Disappointing holiday-season sales at Macy's, Kohl's, and Sears underscored the uphill task facing department stores to win back shoppers, who are increasingly turning to online retailers and spending less on apparel. Macy's reported comparable sales fell 2.1% in November and December combined, and the company said it expected a similar decline in 2017. Ouch. Sears and Kmart stores reported a 12-13% drop in same-store sales for November and December - even bigger ouch. The companies are struggling against an overall holiday season that was modestly good. The National Retail Federation estimates that 2016 holiday period delivered sales growth of 3.6% helped by a jump in spending in the last days of December making up for a slow start to the shopping season. By the way, Amazon said it had its "best ever" holiday season shipping more than 1 billion items worldwide -- just crushing it.
BMR Companies and Commentary
Facebook (FB: $123, up 7% for the week)
Facebook is turning to a former television news journalist to help smooth over its strained ties to the news media. It has hired Campbell Brown, a former NBC News correspondent and CNN prime-time host, to lead its news partnerships team, starting immediately. The company does have some seasoned journalists in its ranks. But it does not have any in a senior position working on its newsroom partnerships, contributing to a disconnect between the company and news organizations.
The addition of Ms. Brown comes as Facebook is struggling with its position as a content provider that does not produce its own content — that is, as a platform, not a media company. In the past few months, Facebook has faced criticism for giving too much prominence to fake news; for censoring as offensive an iconic Vietnam War photograph of a naked girl fleeing a bombing attack; and for allegations that members of its “trending topics” team, which is now disbanded, penalized news of interest to conservatives.
BMR Take: The new hires goes a long way to addressing the weak sentiment around Facebook’s content quality and control. Investors can now return focus on the 1.8 billion user franchise and all the possibilities for marketing revenue. We continue to remain long term investors in the company as they move towards their short term goal of 2 billion users, and their next goal of 3 billion. We at The Bull Market Report are starting to use Facebook for marketing the newsletter. Of the 1.8 billion users, we are confident that 100 million+ have an interest in the stock market.
Amazon (AMZN: $796, up 6%)
Prior to the holiday season, it was estimated that Amazon’s Echo device had reached a sales milestone, with a recent report suggesting that the retail giant had sold 5.1 million of the smart speakers in the US since it debuted two years ago. Now reports say the Amazon Echo was among the best sellers this holiday season. Momentum continues building.
Amazon Echo is a hands-free speaker you control with your voice. Echo plays music, provides information, news, sports, and so on. We at The Bull Market Report bought one. We love it, especially for music. We can ask it to play a specific song or symphony and it starts playing within two seconds. We are also big Wikipedia users. Now we don’t have to open our iPhone and punch in the buttons, we just talk to Alexa and ask her to find the information and tell us about it.
We see endless possibilities for the voice control technology. When you give a command to Alexa, a recording of that command is stored on Amazon's servers. Right now on the Echo you can place an order to buy something from Amazon simply by saying the words and the goods will be at your door in two days, if you have Prime. Imagine how this technology could be leveraged across enterprise systems. For instance, perhaps in 10 years when you want to buy a stock you just speak the order to the computer and it executes.
Note that Prime now has over 70 million users, paying $99 a year. That’s $7 billion coming in each year – in cash. More than half of all Amazon users subscriber to Prime. (We love it because it comes with Amazon Music for free. And millions of movies as well. For free.)
The e-commerce giant is hardly done with wooing new potential members - and for good reason. Prime shoppers spent about $1,200 on average last year, compared to about $500 for non-members.
BMR Take: We go back to our initiation report on Amazon, which we discussed the business as not an e-commerce company, but rather an innovation machine. Well, they just did it again!
And don’t be intimidated by the price of the stock. Just imagine that they split the stock 10-1, which they just may do some day. That $800 price would then be $80. So if you don’t have $80,000 for a 100 share order, just buy 10 shares, or 40 shares, or 72 shares. The stock price is IRRELEVANT. What IS relevant is the value of the services the company provides and the profit it makes from the revenue it generates. Amazon just celebrated its 22 year anniversary, but we are here to tell you that they are just in the bottom of the 4th inning in a 9-inning game. They have a LONG way to go. $1000 a share is quite possible this year. $1500 a share? Quite possible next year.
Apple (AAPL: $118, up 2%)
Apple customers’ App Store spending jumped 40% in 2016 - fueled by games such as Pokémon Go and Super Mario Run - to provide a much-needed boost to services revenues, at a time when iPhone growth remains sluggish. Payments to app developers, after Apple took its cut, rose to more than $20 billion last year, with growth accelerating in China. This would suggest that Apple itself produced $8 billion in revenue, as Apple gives 70% to the developers and keeps 30% for itself. Both Apple and the developer community are thriving on this front of the business. Very important.
“2016 was an amazingly great year for the App Store," said Apple's senior vice president of worldwide marketing. "We continue to advance what is available for developers to create. And our catalog of apps grew 20% to 2.2 million." We have always loved this part of Apple’s business. For every iPhone, iPad and Mac that is sold, that new user goes right to the App Store for all types of products, especially music and productivity tools. And that revenue goes right to the bottom line and is recurring. We LOVE recurring income.
Why does it matter? In the early years of the App Store, much of the growth was driven by the increasing installed base for smartphones and tablet. But now as the market is maturing, it is notable that Apple’s success is based on driving increased revenues from its existing users. So we need to see solid fundamental trends out of the service business for the stock to work. And we are.
In recent months, Apple has put a spotlight on revenues from online services such as the App Store, iCloud and Apple Music, in order to counterbalance concerns on Wall Street about the iPhone, which saw its first ever drop in sales last year. The App Store growth figures are another great data point.
BMR Take: Even as unit sales are declining, the total number of people who own and use an Apple device has continued to grow, sustaining the App Store’s momentum. The jump in spending is a indicator of health. We look for the services business to support investor confidence in the stock at unit sales face the realities of a mature growth profile.
Alphabet (GOOG: $806, up 5%)
Google's Android Auto is facing a pushback from automakers led by Ford and Toyota. Ford and Toyota recently said four medium-sized automakers — Mazda Motor, PSA Group, Fuji Heavy Industries and Suzuki Motor - have joined their SmartDeviceLink Consortium, which aims to develop an open-source software platform that app developers can use as an alternative to Apple's CarPlay and Google's Android Auto.
We don’t think the news necessarily spells doom. Google has some of the best technologists in the world. Open-source will allow other talented engineers to be able to compete, but that doesn’t mean they will win.
Google has revved up efforts to integrate their smartphone technologies with auto communications systems. Google and Fiat Chrysler Automobiles, which have teamed on autonomous-driving technology, recently said they would expand their relationship to create an in-car infotainment system using Google's software.
BMR Take: We see Google as a leader in autonomous cars and connected communication software in vehicles. Both are lucrative end markets and support our favorable outlook for the business.
Microsoft (MSFT: $63, up 1%)
A new survey found that enterprises strongly prefer Microsoft’s Azure cloud technology. The survey was conducted in order to gain more knowledge on the "Big Three" cloud providers: Amazon Web Services (AWS), Google Cloud Platform (GCP), and Microsoft Azure.
Nearly 40% of Azure users surveyed identified as enterprises. The trends among enterprises reflect the strength of the Microsoft platform. It goes back to the trust and familiarity issues. Windows Server and other Microsoft technologies are prevalent in the enterprise world. Azure provides the consistency required by developers and IT staff to tightly integrate with the tools that Microsoft-leaning organizations are familiar with.
(This previous paragraph may need to be read again. It is a powerful little piece of information.)
Interestingly, breaking down the Cloud opportunity, the research suggested that infrastructure-as-a-service will reside mainly on AWS, cloud services will be on Microsoft's side, while Google will dominate analytics. While every platform offers each type of service, people will want the best.
BMR Take: We are thrilled to learn Microsoft’s enterprise relationships are healthy and transferring over into the Cloud opportunity. Overall, this looks like a win win win as three of the companies in our portfolio benefit from the Cloud.
Eli Lilly (LLY: $76, up 3%)
Eli Lilly announced a series of changes to its organization and leadership structure to better align them with the company's growth opportunities. Lilly begins 2017 with a clear view of its opportunities for growth in the years ahead. The adjustments announced to pharmaceutical therapeutic and geographic business areas are designed to maximize the potential of the late-stage pipeline and newly launched medicines, while improving productivity.
The organizational changes are expected to increase productivity and simplify Lilly's global commercial organization. These changes also result in a reduction in leadership positions. In December, the company announced reductions to its US field force in anticipation of patent expirations for key products later this year and in response to clinical trial results on solanezumab.
With new medicines recently launched - and potential new medicines in development for cancer, diabetes, autoimmune diseases, neurodegeneration, and pain - Lilly is in the early stages of a new growth period. Now is the time to make sure that the organization is set up to make the most of these opportunities. With clear priorities and the right structure, achieving growth while improving productivity will go hand-in-hand.
BMR Take: We are excited to see these leadership changes be announced. Eli Lilly is in a turnaround situation. Change is warmly welcomed.
Under Armour (UAA: $30, up 5%)
Under Armour revealed a new revolutionary sleep and recovery system including the brand's first-ever Athlete Recovery Sleepwear powered by TB12™ and a new UA Record™ app experience, both designed to improve sleep and overall athlete performance. UA Athlete Recovery Sleepwear was developed in collaboration with Under Armour athlete Tom Brady, who credits sleep as one of the most important components to his training regimen.
Through the new UA Athlete Recovery Sleepwear, Brady and Under Armour aim to provide all athletes with the off-field support that will maximize their ability to perform. Under Armour has incorporated the bioceramics technology - used and validated by TB12 - into a pattern lining the garments, which are designed to maximize comfort and fit. The pattern includes special bioceramic particles that absorb infrared wavelengths emitted by the body and reflect back Far Infrared, helping the body recover faster while promoting better sleep.
By using the Athlete Recovery Sleepwear and UA Record together as a system, athletes will be able to accelerate recovery time and gain a deeper understanding of their sleep. As part of the system, Brady also helped develop six steps to better sleep to further educate athletes, which will be incorporated in retail packaging and available on UA.com/TB12.
Under Armour's science-backed approach to sleep and recovery is strengthened by a new collaboration with Johns Hopkins Medicine centered around tracking, understanding and analyzing sleep patterns. Under Armour has engaged a team of sleep experts at Johns Hopkins Medicine who are working to study the effectiveness of sustained patterns in improving overall sleep behaviors. This in-depth evaluation on sleep comprises the first scientific study powered by the Under Armour Connected Fitness platform and will help shape the brand's sleep products and UA Record user experience.
BMR Take: There is a big opportunity in health data analytics. Under Armour is well positioned to win it. The news of this sleep product is just the tip of the iceberg. Stay tuned. And stay tuned for a higher stock price in 2017. This stock WAY underperformed in 2016. This year the company will outperform.
Upcoming Economic News
THURSDAY, JANUARY 12
Import Price Index – December
Time: 8:30 am
Forecast: 0.8%
Rising commodity prices can lead the December Import Price Index to the biggest gain in seven months. Yet even with frequent monthly gains throughout last year, the yearly decline of 0.1% for the Import Index in November hints that price pressures on consumers and businesses have not been overly burdensome.
FRIDAY, JANUARY 13
Producer Price Index – December
Time: 8:30 am
Forecast: 0.3% overall, 0.1% core
Higher fuel costs can lead the Producer Price Index to the second straight substantial monthly gain in December. The PPI now points to an end of a disinflationary period, rising at the two-year high rate of 1.3% yearly to November. That trend gives the Federal Reserve some confidence that it can tighten monetary policy.
Retail Sales – December
Time: 8:30 am
Forecast: 0.4% overall, 0.5% ex auto
Rising incomes and higher gasoline costs can lead a solid gain for retail sales in December. Sales have shown some uplift of late, rising 3.8% yearly in the three months ending November - the best such result in seven months. But while the rate of retail sales and personal income point to healthy consumer trends, they fall short of the more dynamic growth periods of the recent past when these items rose in excess of 5%.
Business Inventories – November
Time: 10:00 am
Forecast: 0.3%
Business inventories are projected to expand in November at the fastest rate in eight months after sliding in the previous month. The inventories-to-sales ratio of 1.37 in October is the lowest in 15 months. A positive sales trend is now lifting the corporate outlook.
University of Michigan Consumer Sentiment – January
Preliminary Time: 10:00 am
Forecast: 99.0
Consumer sentiment in the Michigan survey may reach its highest level in over a decade as postelection optimism persists. Higher fuel costs may have a key role in influencing sentiment in the months ahead. Though more expensive fuel can weigh a bit on confidence, it can also lift consumer inflation expectations from their record lows.
Some Recent Upgrades for Apple ($118).
1/5/2017 Longbow Research set its Price Target to $140
1/4/2017 Nomura Securities set its Price Target to $135
1/4/2017 Guggenheim initiated coverage with a Buy and a Target of $140. (Where have you been all these years Guggenheim?)
1/3/2017 Drexel Hamilton reiterated a Buy rating of $185.
Remember, Apple’s all-time high is $134 – only $16 away. We have been predicting that this record will fall. Wait until Trump starts talking repatriation of all the cash that is overseas.
Opko Health News
Two interesting events popped up in the insider trading report for Opko Health (OPK: $9.38, flat). Executive VP for Administration, Steven Rubin, purchased 2,000 shares at $9.17 a week ago Friday, and CEO Philip Frost has continued his open market purchases too - 25,000 shares the same day.
Interestingly, Rubin owns 5,573,000 - and yet he is still buying more. Let’s hope they know something positive is coming.
A Word from Gary Jefferson of UBS Securities
Jefferson Financial Group
First Vice-President, Investments
2017 won't be any different from any other year in that it will bring unlimited challenges and opportunities for investors. The new year also always brings with it a "market opinion", which provides the basis for building or adjusting portfolios around that investment outlook. Additionally, when there is a change in market sentiment, it’s usually also time for a change in portfolio direction. For example, during the past few years the sentiment favored deflation. After the election, it clearly favors inflation.
The market has just experienced a post-election melt-up which is utterly opposite of what was predicted by nearly every expert. Because it is the same elites and mainstream media who now are predicting a strong bull market ahead, we are going to take a slightly more cautious approach. We are bullish, but it is simply too early to know whether this rally is the start of a new bull market or just a big sigh-of-relief rally that will eventually fall back into a wait-and-see market. The "what-ifs" are still here, and are too many to just shrug off with abandon. Some of these include: 1) What if the repeal of Obamacare bogs down? 2) What if there is a serious breakdown in China trade relations? 3) What if the Fed raises rates too fast? 4) What if Brexit creates disorder in the European markets? And we could go on and on. (And don’t forget about black swans. Black swans are events that happen that NO ONE thought about beforehand.)
That said, we are optimistic about the US markets for the primary reason that corporate earnings are expected to rise by double digits in 2017 and again in 2018. As long as we have reasonable expectations of earnings growth, we believe the market will rise higher on those expectations. We will remain somewhat cautious so that we can better adjust to any "What-ifs" that may occur, but we enter 2017 with a confidence we didn't have the past two years when we were in an earnings recession. This new "Trump Revolution", as some are calling it, could be a once-in-a-generation changing of the guard that will have a powerful impact on domestic policy, geopolitics and the American economy. It has the potential to provide a powerful tailwind for the US stock market over the coming years and, at this juncture, we are excited about the potential that 2017 and beyond holds.
Twilio Update
A reader, Rob Jolly, wrote us and mentioned a negative article about Twilio from one of our competitors. We find this company to be very superficial sometimes. Here is what we wrote him back.
Hi Rob –
There is nothing new in this report. It is just an advertising puff piece. What IS new is the lower stock price. It is very distressing and we really won’t know anything until earnings come out on February 2nd or so. It is torture waiting for this date though, especially after last week’s showing. The earnings release will show if Twilio is still on track for great things as we expect. But the stock dropping like this can cause great upset.
Todd Shaver
Twilio Consensus Ratings
There are six Hold Ratings and six Buy Ratings on Twilio (TWLO: $28, down 4%)
The Consensus Price Target is $41.
1/5/2017 KeyCorp has a Price Target of $36
1/5/2017 Pacific Crest - $36 Price Target
12/19/16 Drexel Hamilton initiated coverage with a Buy and a $45 Target
A Review: (Some of this may be dry to you, but if you can wade through it, you may see the potential in this company like we do.)
Twilio offers Cloud Communications Platforms. The Company enables developers to build, scale and operate real-time communications within software applications. Its Programmable Communications Cloud software enables developers to embed voice, messaging, video and authentication capabilities into their applications via its Application Programming Interfaces. The Super Network is its software layer that allows its customers' software to communicate with connected devices globally. It interconnects with communications networks around the world and continually analyzes data to optimize the quality and cost of communications that flow through its platform. The Programmable Communications Cloud consists of software products that can be used individually or in combination to build rich contextual communications within applications. The Programmable Communications Cloud includes Programmable Voice, Programmable Messaging, Programmable Video, and Add-on Marketplace.
The Options Corner
Buying LEAPS
What are LEAPS? They are options that expire in January that have a least six months of life. Thus we are looking at January 2018, January 2019 and occasionally January 2020.
Why LEAPS? They allow you to control a stock for 20-40% of the cost of buying it outright. Also, it allows you to buy an $800 stock for $100-200 or less.
Here’s an example: Say you want to buy Google because you think it is heading to $900. The stock closed at $806 on Friday, but let’s round this to $805. You could buy the January 2018 700 LEAP for $145 a share, or just 18% of the stock price. Let us explain. That gives you control of the stock at $700 a share. In other words, the option gives you the right to buy the stock for $700 a share for the next year. But as you can see, there is a cost to that. The option is WORTH just $105. Do you see that? If you can buy the stock for $700 and it is trading at $805, then the option is WORTH $105 (intrinsic value). Since the option is trading for $145, what is the rest of the cost? TIME VALUE. And that time value will go away between now and the expiration on the 3rd Friday of January, 2018. Is it worth it to you to do this? Well, that is the age-old question.
Let’s look at some scenarios. Let’s first look at the bullish argument and then the bearish argument. Oh – By The Way (BTW), OPTIONS ARE RISKY. Consult your advisor before jumping in.
OK – let’s say the stock goes to $900 by expiration. Is that possible? Well, it sure is. It’s like a $81 stock going to $90 in a year. Is that possible? Sure.
Now, if the stock goes to $900, the option HAS TO TRADE for at least $200. Why? Because you have the right to buy Google at $700. Do you see this? If not, go back and re-read the above. You could sell the option then and take your profit. (Keep in mind that options are mostly fairly liquid, so unless there is a market panic, there is a market for the option, meaning you can sell it whenever you like.)
How about a negative scenario. If the stock goes to $700 by expiration guess what the option will be trading for? ZERO. And here’s the rub: If you own the stock, you have lost 13% - it went from $805 to $700. But if you bought the LEAP, you have lost 100%. The good thing is you only had 18% of the value of the stock invested.
SELLING OPTIONS AGAINST THE LONG LEAP
Since about $40 of the cost of the LEAP in the above example is TIME PREMIUM which goes away a little every day (wasting asset), it is a wise idea to SELL an option against the LEAP in order to get the cost of the options down. If you owned the stock and sold options against it, it is called a covered call. In this case it is a covered LEAP.
Example: Using the same option above, you could SELL an option on Google. You could go out to June and SELL the 850 call. That would bring in about $28 per share. Since you paid $145 for the call, your cost has just been lowered to $117. If the stock stays below $850, the 850 call will expire worthless and then in June you can do this again – you could sell a December or January call and bring in another $28-30, further reducing the price of the LEAP to around $90. If the stock stays above $790 you will make money from this trade. In fact, if the stock goes to $900, you would more than double your money (Cost - $90, LEAP would be worth $200.)
There are endless strike prices and expiration dates for options. The January 2019 700 LEAP for example trades for $180. More expensive than the example above, but you have one more year that the 2018 option, giving time for Google to rise AND to sell options against the LEAP. The January 2019 800 call trades for $120. This gives you another year, but most of it is time premium. Ah – so many choices and decisions!
There is so much more to write about trades like these. And there are many ways that things can change during the year, that this is not for the conservative investor. But if you are aggressive, I think you can begin to see the potential benefits of options. And the risks!
The High Yield Corner
Last week was one of the strongest weeks for high yield assets in the last year. That’s saying a lot. We’ve seen double-digit returns yields on many of our picks and throughout various high yield sectors and asset classes. The fact that this strength is continuing deserves some consideration.
Keep in mind that mainstream media outlets have pounded the table with a clear warning: “Interest rates are going to go up, and high yield assets will lose favor as a result. Investors will sell corporate bonds, municipals, and other high yielders in favor of better-yielding U.S. Treasuries.” This warning has been in the air since 2011, but there’s real bite to it now. The Federal Reserve has hinted that three rate hikes are coming in 2017, and they even more recently asserted that a path towards higher interest rates is “appropriate” for America’s economy today. It seems clear that interest rates are bound to rise.
Yet high yield assets are not selling off as expected. There are several reasons for this, which we discuss below. But before we get into that, it’s important to put this in perspective. We have been hearing for half a decade that higher interest rates will cause massive selling of high yield assets. We saw those sell-offs in 2013 and 2014 when the Fed postponed rate hikes. Now the Fed is raising interest rates - and the high yield assets aren’t selling off. Is the market just too slow to respond?
Of course not. A slow market would provide arbitrage opportunities for hedge funds. The reality is more mundane - and more predictable.
The mainstream media outlets are wrong.
They are wrong that high yield assets will sell off in a rising interest rate environment because: They are working on the overly simplistic assumption that people who are buying REITs, junk bonds, etc. will jump into U.S. Treasuries en masse. While we must expect some migration, the question is how much. A spread between those yields and U.S. Treasury yields must exist - but as long as it exceeds the expected risk of those asset classes, people will still demand REITs, junk bonds, and so on.
Right now the spread between high yield assets and Treasuries is about 4%. We are nowhere near the peak levels of 1997 and 2007, when the spread was less than 3%. If we get to that point, we may see a serious high yield selloff, and that will encourage us to be less bullish on high yield assets. Until that point, however, we are maintaining our high yield recommendations with conviction.
The UBS Etracs BDC ETF (BDCS: $23) was an exceptional performer, rising 3% this week on little news but continued optimism about inflation and demand for financial activity. Remember that many BDCs finance firms in the infrastructure sector - and that sector is poised to get a lot of demand if President-elect Trump’s promised spending plans actually materialize. The market is betting on that, driving the sector higher.
The SPDR Barclays High Yield Bond ETF (JNK: $37) was the weakest high yield asset class this week, up a mere 1%. The fact that a 1% weekly increase is the worst performer demonstrates the serious strength in high yield assets, and steels our resolve to hold on to both our favored high yield bond funds and high yield assets in general.
The Alerian MLP ETF (AMLP: $12.81) saw a near 2% rise this week, driven in part by higher oil prices. There is renewed confidence that OPEC will succeed in its oil production cut, which in turn is driving energy stocks up all over the place. However, the impact of higher oil prices on MLPs is unclear, since many deal in natural gas and most don’t benefit from higher oil prices in any direct manner. This leaves us cautious about jumping into this sector as always; it remains uncertain whether MLPs will continue to shoot up this year even if oil prices go up. We will need to see fundamentals at MLPs improve first before recommending this sector.
The SPDR Dow Jones REIT ETF (RWR: $95) was the biggest winner this week, rising over 3%. There are two reasons for this strength. First and most important, REITs are still recovering from their oversold correction in late 2016. Again, rising inflation and higher infrastructure spending will have a positive impact on many REITs, both in and out of the infrastructure sector. Commercial REITs and REITs that lease retail shops should see a benefit from the increased spending, as well as renewed consumer confidence. And that confidence seems to be coming. Hourly wages rose 2.9% according to the government’s last study - a very strong increase indeed, and one of the best readings we’ve seen in a decade. What this means for REITs is simple: More money in Americans’ pockets will mean more spending at retail shops, which will mean more demand for retail space. The benefits for REITs across the board are clear, which is why the market is finally realizing it made a big mistake selling these stocks and is buying them back at a quick pace. This purchasing is likely to continue for a few weeks.
With this bullish activity, our picks had a great week.
Digital Realty Trust (DLR: $98) rose nearly 6% in just one week. Our resolve to hold onto this high growth REIT has paid off, and we are enjoying the 3% dividend yield and appreciate the highly sustainable income that is set to grow. We expect one very large dividend increase from DLR this year, or possibly two small ones; with that in mind we are not considering selling even after the surge last week.
Similarly, Kimco Realty (KIM: $26) rose over 4% as the strength in REITs swept this firm up in its tide. It’s a topsy-turvy world. Kimco is a larger, slower-growth REIT yet its dividend is over 4%, significantly higher than Digital Realty’s. This will not last. We expect Kimco to rise significantly in price this year until its yield falls lower than Digital Realty. For this reason, our strategy with this stock is a bit different: We’re waiting for enough price appreciation to warrant selling. For this reason we are lifting our target price to $35, which is above its 52-week high. This would be a great exit point for Kimco, and we expect it to reach that price either this year or next.
Municipal bonds are continuing their recovery, giving us more confidence in our soon to be added stock: Invesco Municipal Trust (VKQ: $12.42) to the High Yield Portfolio. The Trust rose 2% in the last week and is now over 4% above its 52-week low. We like its price right now for more purchases, and we expect it to keep rising in the coming weeks as the Municipal Bond market returns to reality. This fund is down nearly 3% in the past year, giving us plenty of room for capital gains in the short term. With this in mind, there is a good reason to bet heavy on municipal bonds, and this is a great fund to do it.
Look for the Research Report Tuesday morning.
Additionally, we saw the Nuveen AMT-Free Municipal Credit Income Fund (NVG: $14.70) rise over 3% last week. That’s helped the fund go positive on a year-over-year basis, excluding payouts.
That’s all for High Yield this week and for this week's newsletter.
Good Investing,
Todd Shaver
CEO and Founder
The Bull Market Report
December 4, 2016
by Todd Shaver | Dec 4, 2016 | Weekly Newsletter 7pm Sunday
The Week Ahead
The S&P was up 4% in the month of November. We've seen a 6% rally since the US Presidential election. With so much money being made in the month of November, we are hopeful for December’s prospects but realistic that repeating November’s performance is a tall order. One particular area to focus on this month is the upcoming Fed meeting. Everyone will be watching for clues from Yellen about the pace of interest rate hikes for next year. The market is currently pricing in two hikes so anything more would be troubling.
This week we provide some insights on our latest thinking for Athenahealth, Apple, Amazon, Splunk, and the iShares Dow Jones US Energy Sector ETF.
Key Market Measures (Friday’s Close)
Highlights From The Past Week
Looming Pension Crisis. Stanford University’s pension tracker database pegs the 2015 market value of California’s total pension debt at $1 trillion or $93,000 per California household. In 2014, California’s total pension debt was calculated at $77,700 per household, but has increased dramatically in response to abysmal investment returns at California’s public pension funds that hover at or below 0% annual returns. Looking back to 2008, the under-funding levels of California's public pension have skyrocketed 157%. The fact that CalPERS is having such a difficult time with what should have been an easy decision to lower their long-term return expectations to 6% from 7.5%, just further reinforces how big of a mess this entire pension issue is.
Italian Referendum. The vote happens today. While the post-Trump euphoria in US stocks has been the perfect distraction from the ugly realities elsewhere, this weekend's Italian Referendum could well be the biggest 'revolt' yet, topping Brexit and Trump. Should Italy vote "no", as polls forecast, Prime Minister Renzi may quit, which would leave the Italian bank recapitalization underway in jeopardy. Some say, this could cause a Greece-like market reaction on steroids.
The Future of the Fed. As Trump and his new appointments take power, the Federal Reserve could be targeted for overdue changes and reforms. Let’s take a look at how the Trump administration may change the Fed, as ultimately, the future leadership of the Fed will mean a lot for interest rate levels and so much more. It’s no secret that Trump has a bone to pick with the Fed, so he could be the first President in years to strip away its independence. There’s no law on the books that protects the Fed’s independence. The broad freedom assumed by the Fed over the past several decades relies solely on the president’s discretion. Just days before the election, perhaps sensing reason to be worried, Fed Chair Janet Yellen started to publicly argue the importance of an independent Fed.
Separately, Trump himself has toyed with the idea of putting America back on the gold standard. There are two empty seats on the Board to fill. Fed Chair and Vice Chair appointments will happen very soon in 2018. So much to watch.
BMR Companies and Commentary
Athena (ATHN: $96, -6% for the week) The stock struggled this week. There was no company-specific news; rather, broader industry events developing. President-elect Donald Trump’s selection of Republican Tom Price to head the Department of Health and Human Services signals that the new administration is all-in on both efforts to repeal the Affordable Care Act and restructure Medicare and Medicaid. This change is going to matter for Athena.
Privatizing the Medicare program for seniors and disabled people and turning the Medicaid program for the poor back to the states are long-time goals for Republicans in Congress and the White House. They say the moves could help put the brakes on healthcare spending.
Why does the policy change have to be done? Healthcare spending is out of control. Medicare, which covers roughly 57 million elderly and disabled Americans, and Medicaid, which covers more than 77 million people with low incomes, are among the biggest items in the federal budget, together costing an estimated $1 trillion in 2016, according to the Congressional Budget Office.
However, cutbacks to healthcare spending will weigh on companies in the industry, like Athena. Estimates from the Urban Institute say that new proposals could result in 17 million people losing coverage and that payments to healthcare providers could be cut by nearly a third. Ouch.
We want to point out that that the potential repeal of The Affordable Care Act does not impact Athena as their market share as of this point is virtually zero. While the numbers look big at first glance, don’t panic because it doesn’t mean the cuts will hit everybody equally. Athena is very well-positioned to see much less headwind than others. Plus, whatever reimbursement headwinds surface to pricing, Athena can offset that by more volume through working with more providers and offering more products.
BMR Take: We think now is an opportunistic time to be buying Athena. The company is a leading provider of cloud-based services and mobile applications for medical groups and health systems. Sentiment around healthcare is at noteworthy low levels. You can buy a superior company in the space for under $100 that was not long ago greater than $165.
Amazon (AAPL: $740, -5%) Amazon’s annual AWS re:Invent conference was held in Las Vegas this week. New products, features, and services are extending Amazon’s cloud lead across the cloud computing sector.
AWS (Amazon Web Services) introduced over 24 new products and features this week and is on track to add 1,000 new products this year (up 40% from a year ago). One of the key announcements was improvements to the database storage product, Aurora, which is the fast growing product within AWS.
Enterprises, both large and small, are increasingly adopting more of AWS’s products and services, creating a more loyal base among its 1 million+ users. As an example, the government agency FINRA (Financial Industry Regulatory Agency) was at the conference discussing how they not long ago made the decision to move to AWS. FINRA’s adoption of AWS took 2.5 years to complete and is one of the largest migrations to-date due to its vast amount of data. FINRA oversees around 4,000 financial institutions, 64,000 brokers, and stores 75 billion events per day generating 20+ petabytes of data and trillions of records, and now 90% of its total data volumes are stored in AWS. What a success story!
BMR Take: AWS is on track to contribute $17.5 billion of revenue for Amazon this year, that’s up 40% from a year ago. The cloud business remains explosive and one of the core reasons we are positive on the stock.
Apple (AAPL: $110, -2%) After skipping Black Friday last year, Apple returned to the traditional one-day shopping event with Apple Gift Card discounts across products such as the iPhone, iPad, Apple Watch, Mac and Apple TV. Apple remains one of the best-positioned tech companies to benefit from spending trends this holiday season with a well-received iPhone 7 and 7 Plus, a new Apple Watch, and a new MacBook Pro with Touch Bar. It was exciting to see the company get back in the discount game with the “one-day shopping event” and we are confident the marketing strategy boosted holiday sales.
For several years, Apple participated in the Black Friday celebration; however, the company surprised everyone when it sat out last year's Black Friday celebration. The company returned this year with Apple Gift Cards with the purchase of certain iPhones, iPads, Apple Watches, Macs and Apple TVs. In 2014, Apple offered RED iTunes Gift Cards during Black Friday but this year is offering Apple Gift Cards.
Specifically, for iPhones Apple was offering $25 and $50 Apple Gift Cards. This implies a discount of 6-9%.
BMR Take: We think Apple at $110 is a compelling value (with $44 of that in cash.) We see the return to discount pricing as a potential game changer for holiday sales this year. If true, the Wall Street adage of “better numbers means the stock is going higher,” seems at play.
Splunk (SPLK: $54, -8%) Splunk reported earnings this week. The company delivered a strong quarter, with revenue of $245 million, up 40% from a year ago, versus consensus of $230 million and EPS of $0.12 versus consensus of $0.08 and $0.05 a year ago. Splunk raised full-year guidance as overall execution is running solid. A very strong report.
The highlight of the quarter was an acceleration in license growth from 32% a year ago in Q2 to 34% in Q3, which dramatically beat consensus expectations calling for deceleration to 23%. Splunk added 500 new customers and completed 480 deals over $100k, up 30% from last year. Cloud business tripled, once again exceeding the company’s plan. All great stuff!
BMR Take: It was nice to see quarterly results largely confirm why we like the outlook for the stock. Many analyst price targets remain at $70 or higher. In fact, one investment bank just recently initiated the company with a $80 price target. All signs point higher.
iShares Dow Jones US Energy Sector (IYE: $41, +3%) Did you catch the crude oil price change in the Key Market Measures chart earlier in this report? Crude oil at $55 up 20% from just last week. Not a typo! OPEC reached a deal to cut production. Oil prices surged upon Saudi Arabia and Iran signing on to a deal at the OPEC meeting in Vienna.
They say Russian President Vladimir Putin played a crucial role in helping OPEC rivals Iran and Saudi Arabia set aside differences to forge the cartel's first deal with non-OPEC Russia in 15 years. Putin’s role was also a testament to the rising influence of Russia in the Middle East since its military intervention in the Syrian civil war just over a year ago.
BMR Take: With OPEC, Putin, and Trump all pushing for higher oil prices, it sure seems like the $50-60 level is here to stay, or even perhaps the $60-70 level may be quickly approached. Investing in the Energy sector recovery remains one of our favorite ideas.
Upcoming Economic News
MONDAY, DECEMBER 5
ISM Non-Manufacturing Index – November
Time: 10:00 am
Forecast: 55.1
The ISM Non-Manufacturing Index looks to edge higher in November as consumer spending on services continues to advance at a steady pace. Real spending on services rose at least 2.5% in each of the past two quarters, avoiding the letdown seen in the Manufacturing sector. The new orders component of the Non-Manufacturing index exceeded the solidly expansionary level of 57 in four of the past five months. That indicator supports growing demand for services in the months ahead.
TUESDAY, DECEMBER 6
Trade Balance – October
Time: 8:30 am
Forecast: -$40.0 billion
Rising imports are expected to cause the US trade deficit to widen in October. Exports have been on a tear of late, adding 1.2% to real growth in the third quarter - the largest contribution in 11 quarters. Yet that boost came before the latest run-up of the dollar, which will challenge export growth going forward.
Productivity & Unit Labor Costs – Third Quarter
Final Time: 8:30 am
Forecast: 3.2% productivity, 0.3% unit labor costs
The revision of third quarter productivity figures will likely confirm the strongest result of the past eight quarters. Positive effects from growing inventories and relatively restrained hiring growth has boosted output efficiency. Yet with productivity growing a mere 0.3% annualized over the past two years, stronger sustained trends in investment are needed to improve the long-term pace.
Factory Orders – October
Time: 10:00 am
Forecast: 2.4%
A bulge in Transportation sector orders is forecast to lead overall factory orders higher for the fourth consecutive month in October. Near-term business investment trends are looking solid after core capital goods orders rose 4.4% annualized in the quarter ending October. Yet continued progress is needed to lift industrial output trends, as such orders fell 3.6% against the same period in 2015.
FRIDAY, DECEMBER 9
University of Michigan Consumer Sentiment – December
Preliminary Time: 10:00 am
Forecast: 94.0
Consumer sentiment may rise to the highest level in 7-months in December, perhaps reflecting some of the same post-election optimism seen in the stock market. Prior to recent OPEC moves to tighten supply, consumers benefitted from gasoline prices that fell to 7-month lows in late November. However, those gains may not filter to retailers, who are being hurt by having to offer consumers greater discounts.
Eli Lilly (LLY; $67, down 2%) The Latest News
Eli Lilly is a $71 billion machine that has seen a rocky road these past few weeks. After hitting the $78 level in early November the stock got hammered down to its current level due to Lilly’s announcement that its Alzheimer's drug solanezumab had failed to significantly improve on cognition. But then on Friday we saw some good news with an announcement that the FDA approved Lilly's new drug application for Jardiance to be used in reducing cardiovascular mortality in adults with type 2 diabetes. One analyst reported that Lilly’s revenue could increase by $1.7 billion in 2025 on expanded Jardiance sales. Wow. The good with the bad. The bad with the good. All in all, Lilly will survive and thrive. And we are preparing a research report and should be able to publish this mid-week.
Apple Investment Idea
The Options Corner
Here’s an idea for the aggressive investor to put some cash in your account using this stock. If you agree with the premise that every share of stock at $110 includes $44 in cash, you might conclude, like we do, that there is somewhat of a floor under the stock. There is no other company in the history of Wall Street that has had this much cash as a percentage of the stock price. $44 a share is in cash. That’s 40% of the price of the stock. So you get the entire company, ex-cash for only $66. Now, with that said, what we are going to suggest here is a very risky idea: Selling naked puts on Apple.
Selling naked puts offers you two things: Being able to but the stock at a lower price than it is now (if the stock falls), and a way to put cash in your account immediately. But it comes with great risk.
There are lots of choices of selling puts on Apple, but let’s say you think the stock going down to $100 by February 17th is not likely. And in fact, if it did, you wouldn’t mind buying the stock down there. What you can do is to sell the February 100 put for $1.45. Since options are traded in 100 share lots, that means you can get $1,450 for every 10 options that you sell. Now by doing this transaction you are obligated to buy 1000 shares at $100 if it goes below $100. So you must have $100,000 at the ready to do this. The stock is at $110 now so buying it a $100 sounds good at this point. Also, since you got $1.45 a share for selling the put your actual purchase price is $98.50. Again, this sounds good, unless the stock goes to $95 and you are forced to buy it at $100, which can happen, and that’s why selling naked puts is risky.
However, you can always BUY BACK the options that you sold to get out of the trade. In other words, you are not 100% obligated to buy the shares if it goes lower – you can always buy back the option which leaves you with no position and thus no risk. You may have to pay a higher price for it since the price will go up as the stock goes down, and thus you will lose money on the trade, but at least you can get out of the trade if you like. Note that as time goes by – as you get closer to the expiration of the option, February 17th, and if the stock stays in the same general area of $110, the price of that option will approach zero which of course is exactly what you want to have happen. (If you sell something first, you want it to go to zero. If you buy something, you want it to go up. Right?)
That’s our discussion of options this week. You can do this with most stocks, so it doesn’t have to be Apple. Virtually all stocks have listed options and you can check them out here:
http://finance.yahoo.com/quote/AAPL/options?p=AAPL&date=1487289600
This is a great site with a wealth of information about option pricing. You can spend hours here researching all of your favorite stocks.
Groundbreaking news: The US is Now a Net Exporter of Natural Gas The U.S. exported an average of 7.4 billion cubic feet of gas a day in November, more than the 7.0 billion it imported, with the biggest buyers being Mexico and Canada. Gas exports have risen more than 50% since 2010. The Energy Department says the country will be the world’s 3rd-largest producer of liquefied natural gas by 2025, trailing Australia and Qatar.
FANG Stocks Taking a Breather
Three of the four big internet stocks that make up the FANG group took a pounding last week, despite upbeat reports from various firms on the Street. FANG is made up of Facebook (FB: $115, down 4%), Amazon.com (AMZN: $740, down 5%), Netflix (NFLX: $121, up 3%) and Google-parent Alphabet (GOOG: $750, down 1%). We always like to add Apple, to make it FAANG because there is so much value represented here, Facebook - $330 billion; Amazon - $350 billion; Apple - $585 billion (largest in the world); Netflix - $52 billion – just a puppy; Google - $520 billion - Going to catch Apple some day?
BMR Take: Since Trump was elected these stocks have been poor performers. Do we care? Well, we care but we are not worried. Why? Because we know that the companies don’t care – in other words, all they care about is increasing revenues and profits; well, at least all of them except Amazon! We kid about Amazon. We just read the book The Everything Store by Brad Stone. Shall we say this is a must-read? Wow – what a story. Read this and you will think like we do that Amazon can go to $1500 a share in the near future. Amazon is making money – it’s just that they are spending it just as fast on infrastructure build. We secretly believe that they could report stellar earnings any time they darn well please. But since DAY ONE they have been building for the future. And selling over $30 billion each QUARTER is proof that they are on to something big.
We digress. Our point is this: Each of these five stocks is growing revenues in a big way. Profits have followed at all of them but Netflix, but they are building for the next decade and are spending big money on content ($6 billion next year). So again, we are not worried about a slight lull in the upward march of the stock prices for these five. It will come in due time,
Ferrellgas Update
Ferrellgas (FGP: $5.65, down 14%) cut the dividend from $2.00 a share to 40 cents, bigger than what we had thought and bigger than the market had anticipated. This is a savings for about $160 million a year. The company cited difficulties in its midstream business due to the loss of its largest customer (supplier Jamex Marketing), a warmer-than-expected early winter season, and "general market conditions." Blah, blah, blah. We’ve heard that story before. A lot of this mess was caused by buying troubled midstream company Bridger Logistics last year which has caused big writedowns and liquidity issues. What a way to destroy a strong, old line, profitable company.
Obviously, we should have stuck to our guns of selling at $15 when we first issued our research report in September. Why didn’t we? Well, discipline. The lack thereof. It’s human nature and we are human just like you are. We added the stock at $17, we had a Sell Price of $15 so we should have removed the stock at $15. That’s it, pure and simple. But we got swayed by the lower stock price and how cheap the stock was, being down from its 52-week high of $21 and an all-time high of $28 set in 2014. We couldn’t see the forest of the trees, and certainly didn’t anticipate that management would make such a big mistake by buying Bridger.
What to do now? It all depends on how much stock that you have and what percentage this investment is in your overall portfolio. So we can’t answer this question for you here personally in this forum. The company is operating on thin ice and the stock could stay here for many months, if not years. But if you want a personal opinion on what to do in your own portfolio, don’t hesitate to write us here at Info@BullMarket.com. Give us some details and we’ll give you our opinion.
Goldman Sachs Group Update
Goldman Sachs (GS: $223, up 6%) had another amazing week and hit $227 on Thursday before pulling back a bit on Friday. We hereby raise our Sell Price from $196 to $214, preserving our big gains, currently up 52%. And we are raising our Target Price from $220 to $245.
The High Yield Report
A Close Look at the Municipal Market
The biggest news in the high yield world right now is actually hard to find; many leveraged closed-end funds reduced distributions this week, after Nuveen cut dividends on a number of funds. This impacted one of the funds in the Bull Market Report portfolio: the Nuveen Enhanced AMT Free Municipal Bond Fund (NVG: $13.90), which fell a little less than 1% this week as the municipal bond market continued to struggle. The decline seems unrelated to the distribution cut, but it is something that investors should be aware of.
At the same time, there’s no reason to panic. The distribution cut was a little over 4% to 7.25 cents from 7.6 cents every month. That’s a loss of 4.2 cents per year, meaning the fund’s yield is still above 6%. Dividend cuts are never welcome news, but as these things go this one is quite small.
Could this cut have been predicted? In a broad sense, yes; as a general rule the ultra-low interest rate world we live in puts inevitable pressure on high yield, which is why investing in these selectively is crucial. On the other hand, the timing of this cut is odd. Interest rates have actually been rising lately, with A-rated bond yields up 18% in the last month. To make things even stranger, Nuveen did not cut distributions on all municipal bond funds. On top of that, Nuveen cut distributions on dozens of funds, ranging from equity-focused to municipals. It seems Nuveen decided to lower distributions to make payouts more manageable across its fund offerings except in those cases where distributions where already so very low that distributions could easily be maintained.
Nuveen is a good fund manager and has done a good job with the Enhanced AMT Free Fund. The fund’s NAV has grown over 6% since inception and the stock has gone up over 7% in the last three years. The recent collapse in the municipal bond market means its NAV is down 3% year-to-date, which is the case for pretty much all municipal bond funds. Cutting distributions to protect future payouts and keep some capital to invest in new municipal bonds makes sense right now, despite the frustrations to investors.
Fortunately, NVG is just one of the 14 high yield recommendations in the Bull Market Report portfolio, so the distribution cut will have a marginal impact on our total payouts. We are still bullish on the fund as an outperformer in the municipal bond market and we are still bullish on municipal bonds, so we are not changing our recommendation for this fund right now. Instead, we encourage you to consider slowly building on your position in the Nuveen fund in anticipation of the inevitable municipal bond recovery.
That brings us to a bigger question - why are munis tanking? Most municipal bond indexes have fallen over 3% in a month’s time. A muni index fund like the iShares S&P National AMT-Free Municipal Bond Fund (MUB: $107) lost 1% this week (more than the Nuveen fund did) and is down nearly 6% over the last three months. Munis are supposed to be a stable asset class. What is going on here?
There are two main causes of the municipal bond rout, and they’re worth understanding in detail.
1. Retail fears. Retail investors dominate the municipal bond market and they will sell off in moments of particular panic. We are in such an environment right now, with greater uncertainty about the future of Treasuries, the economy as a whole, and trade relations between America and foreign nations. Fear is motivating selling.
2. Possible tax cuts. This is arguably the biggest driver behind the municipal bond sell-off. Why do investors choose munis over corporates? One is the relative safety of munis, but a much bigger reason is the tax benefits. Muni bond distributions are tax free, corporate bond distributions are not. With President-elect Trump widely expected to change the tax code, the future of muni tax treatment is uncertain. The thinking is that a big tax cut could motivate people to leave munis because the tax benefits are less than they used to be.
Will Trump change the tax code? We’re not political analysts, and Trump is very unpredictable, so we can’t give an answer with any sort of confidence. What we can say is that the municipal market is over-reacting to the risks of this eventuality. To understand how this is the case, let’s take a close look at the spread between corporate and muni 5-year bond yields. A-rated 5-year munis yield 2.11% on average versus 2.28% for corporates. That’s a difference of 0.17%, or $1.70 for every $100 invested. A month ago, the difference was 0.28%, or $2.8 for every $100 invested.
This means that the market has removed 39% of the tax-based arbitrage opportunity investors have to buy municipal bonds instead of corporates. In other words, the market is anticipating that the tax benefits of munis will disappear and is pricing them accordingly.
The closer municipal bond yields come to corporate bond yields, the bigger opportunity there is for municipal bond prices to rise if the tax benefits do not disappear, since prices are inverse to yields. Additionally, the arbitration opportunity for investing in munis because of their lower default rate also goes up as their yields get closer to corporates. For this reason, we are going to keep a close look at municipal and corporate bond rates to identify when we reach the bottom for munis. It is clearly coming soon, and may arrive before the end of the year.
On the topic of closed end fund distributions, we also heard from one of our favorite funds - the Pimco Dynamic Income Fund (PDI: $29), which soared 3% this week. The fund is now up 5% year-to-date. The fund’s regular dividend is staying the same at a 9% yield, but we did not hear about the fund’s special dividend yet. Pimco seems to be waiting a bit before announcing special dividends on its funds; we expect to hear about this next week or, at the latest, the week after. We know many folks who are buying this stock to get the anticipated big dividend. Of course, be aware that on ex-dividend date the stock opens lower that morning the exact amount of the dividend. So it’s not all icing on the cake, but generally over time the stock moves back to where it was. The operative word is “generally” so be a good investor and be wary.
Finally, on BDCs: The UBS Etracs BDC ETF (BDCS: $21.90) fell 1%, mostly in line with the broader market. This is a modest move, indicating that BDCs are maintaining their strength alongside the Financial sector. We remain constructive on Main Street Capital (MAIN: $36, down 1%) but are still waiting for it to reach a lower level before jumping back in.
Good Investing,
Todd Shaver
Founder and Editor
The Bull Market Report
November 27, 2016
by Todd Shaver | Nov 27, 2016 | Weekly Newsletter 7pm Sunday
The Week Ahead
We finished this week at all-time highs - again! The ‘Trump’ rally has turned into the ‘feel-good’ rally we often see around Thanksgiving and Christmas. With the election over, political uncertainty is down (but not out.) With the post-election rally, the odds of a December rate hike is being priced in by the bond market at 100%, (actually 100.2%), reducing rate uncertainty. What’s left to focus on? We dare say company-specific fundamentals. If that’s the case, we really like the prospects for active stock selection. This week we provide some insights on our latest thinking for Apple, Blackstone, Tesla, Facebook, and Welltower.
Highlights From The Past Week
First, there was Brexit. Then, there was Trump. Now the discussion is turning to Frexit - France electing to exit the European Union (EU). Many are saying that the European Union could not conceivably survive in its current form if France elects National Front leader Marine Le Pen to the Presidency next May. Le Pen is campaigning for a wholesale renegotiation of the EU’s treaties, restoring the primacy of national law, de-emphasizing the European Central Bank, and ending the free movement of labor and goods across the region. We all must watch closely. The political system as we know it in several regions across the globe is crumbling.
Mortgage Market. The rapid rise in interest rates since Election Day is taking a toll on the mortgage market, and lenders are scrambling to adjust. Since Donald Trump’s surprise victory, average rates for a 30-year, fixed-rate mortgage have leapt by more than half a point, to 4.18% on Wednesday. The fast rise in rates has spurred homeowners to pull back from refinancing their mortgages. Applications dropped 3% in the week ended November 18th from the prior one, the seventh consecutive weekly decline, and the second since Election Day. The Mortgage Bankers Association estimates refinances will fall 46% next year, to $485 billion, which will hurt Americans’ ability to free up cash by reducing the cost of their monthly mortgages. As we learned from the 2008 Financial Crisis, given its size, the Mortgage market is a key pillar of the economy. Higher monthly mortgage payments and slower loan growth for banks matter to the economy and sentiment. We need to care about what goes on here.
Infrastructure. The talk of the town right now is Trump’s $1 trillion fiscal stimulus plan for infrastructure investments in the United States. But what many people don’t realized yet is that the amount might be much, much bigger. Why? The concept of Public Private Partnerships (PPPs). PPPs were used by Obama under the Build America Investment Initiative that helped fund the Denver FasTracks commuter and light rail projects in Colorado, the Goethals Bridge reconstruction project linking New York City and New Jersey, and the Bayonne Water Joint Venture project in New Jersey. What PPPs do is match every $1 of private capital offered for a project with $1+ or more of fiscal stimulus money. So Trump’s $1 trillion will really end up resulting in $2+ trillion of infrastructure investment. Exciting stuff! Oh wait – a little bird just told us he has to deal with Congress to get this approved. Now that will be fun to watch.
BMR Companies and Commentary
Apple (AAPL: $112, +2%)
President-elect Trump recently spoke to Apple CEO Tim Cook. Trump asked Cook to think about opening multiple plants in the US to make their products. Trump said he will institute tax breaks for him to do this. Will Apple comply? Can Trump pull it off? What are the implications?
Trump doesn’t want Apple to continue going to China or Vietnam to manufacture iPhones. He wants Apple to do it right here in the US. Trump says it will be a major achievement for the US middle class if he can find the solution to make it happen.
The jury is still out on what it all means, however. Does the US have the skilled labor to do the task? Is this a waste of time because machines are soon going to be doing the work regardless? How many more jobs are we actually talking about here?
Trump’s first line of defense to force the issue on Apple is the threat to tax imports from China. However, China has already committed to a tit for tat trade policy against Trump (whatever he does they will respond equally). Not good. Trump must be careful.
We understand Cook very much wants to repatriate Apple’s foreign cash and Trump has mentioned that he will work on ways to reduce taxes to make this happen. We believe much of the money will likely go to dividends and repurchases. So we will be watching very closely to see if new incentives arise that detour the money into capital expenditures such as new manufacturing facilities.
BMR Take: As long as the repatriation of foreign cash happens, we are content either way with the outcome. If the money goes to dividends and stock repurchases, Apple will head a bit higher in the near-term. If the money goes back into re-building America, this better long term picture for US GDP would be a positive for all stocks.
Blackstone (BX: $27, flat)
Blackstone was solid this week, as we await a move to $30. What’s happening here? So many headlines: Key executive Jon Gray won’t be heading to DC to serve as Treasury Secretary; there is a lucrative deal swirling to pick-up some of Valeant Pharmaceuticals assets on the cheap; a deal is pending to sell a chunk of Japanese real estate holdings; the investment in Optiv has reached a successful exit through the recent $100 million IPO.
We think the big story is simply the broad-based strength seen in the US equity markets. US equity markets are breaking all-time highs. This is a major tailwind for Blackstone. The company has $350+ billion of capital invested where the fees coming back to shareholders are very closely linked to overall valuation levels of the market. The M&A frenzy we’ve recently seen, the return of a healthy IPO window, and the generally more positive sentiment about the US GDP outlook - it all means upside to earnings at Blackstone.
BMR Take: The consensus EPS outlook calls for nearly $3 of earnings in 2017. The current dividend yield is greater than 6%. Why is this not a $30 stock? Why is this not a $40 stock? What a bargain.
Tesla Motors (TSLA: $197, +6%)
Tesla moved up nicely last week. One driver is all the talk of rolling back regulation and placing bigger incentives are what matters most. Despite some of the negative press Tesla gets, you may be surprised to learn that Tesla receives nowhere near the government support of other industries. Perhaps the future for the company will include greater government support.
Tesla has received only a fraction of the subsidies the Big Three auto manufactures have received. Specifically, since inception Tesla has received about $2.4 billion of subsidies or tax breaks. About $1 billion of that was for tax breaks over a 20-year period that started in 2014 when Tesla started construction on the Gigafactory in Nevada. Tesla has yet to utilize those tax breaks and it will have to spend tens of billions of dollars in the state of Nevada over the next decade in order to fully take advantage of them. Look at what other US-based automakers have received over the years. Here are the report cards for Fiat/Chrysler, General Motors, and Ford, in that order: $17 billion, $50 billion, and $27 billion. Wow! Not even close!
Turning to the Energy industry, it’s hard to even quantify considering the influence of using national defense to protect oil interests. Most agree the numbers are much bigger than auto.
BMR Take: Tesla’s receives a lot of flak for the subsidies it receives, but the fact of the matter is that it’s not a lot of money compared to other companies and other industries. The subsidy discussion matters a lot particularly following the November approval by shareholders for the Solar City acquisition. We think Tesla is an even more exciting company with SolarCity and we don’t see a reason to think government support is going away.
Facebook (FB: $120, +3%)
Late last week, Facebook announced authorization to repurchase $6 billion in existing stock. At face value, the authorization reflects 23% of the 3Q16 cash balance and approximately 2% of the market cap. Assuming 100% repurchase in 2017, we estimate about 1-2% potential accretion to 2017 earnings. In terms of timing, the company indicated the repurchase program goes into effect in 1Q17, but gave no specific deadline. One could argue that Facebook is now prepared to act on expected future stock volatility post the 1Q earnings call. One could also argue the buyback announcement now suggests that Facebook sees the stock as attractive today.
BMR Take: We think Facebook is on track to be the greatest advertising machine ever. This repurchase authorization just further supports management’s confidence in the cash flow capability of the company. They must know something we don’t. Can Facebook hit $150 or higher and start to catch Google in market cap? (Facebook is at $347 billion. Google is at $430 billion.) We wouldn’t bet against them.
Welltower (HCN: $63, flat)
The entire Real Estate segment of the market has not been performing well these past few weeks for a variety of reasons. Rising rates hurts the value of real estate prices through higher cap rates. Tepid economic growth limits the ability of raise rents. Sector-specific concerns in Healthcare around drug prices and reimbursement rates have been severely impairing to some tenants.
That said, we continue to see compelling value in Welltower. Welltower is the largest Healthcare REIT and the sixth largest REIT in the US. The 85+ age population is set to double in the next 20 years and Welltower will directly benefit. In fact, the company is increasing its senior living concentration from 65% of the portfolio to 70% in order to capitalize on the opportunity. Compared to other larger diversified Healthcare REITs, Welltower claims the lowest leverage. The company’s real estate holdings touch all major markets in the US, offering strong diversification. The stability of the business is further supported by an investment grade credit rating. The 5.5% dividend yield is more than covered by cash flow, as the payout ratio is greater than 85%.
BMR Take: In real estate, Welltower is a blue chip. We think the 5.5% dividend yield is particularly attractive. We see continued cash flow growth translating into dividend increases, supported by the growth driver of an aging US population occupying Welltower’s real estate holdings.
Upcoming Economic News
Special Edition: 2017 Outlook
There are four key pillars forming our outlook:
--- We look for GDP in 2017 to expand just under 2%...again
--- Fiscal policy, though highly uncertain, should be more of a tailwind.
--- And monetary policy more of a headwind, as the Fed is expected to deliver two more hikes next year
--- Productivity growth will remain subdued
As 2016 draws to a close, the US economy appears to have grown at a hum-drum pace of about 1.8%, quite similar to last year’s 1.9% performance. We’ve been looking for a similar slow slog going forward next year, though recent political developments add an interesting mix to that otherwise boring forecast. On the one hand, if President-elect Trump and his Republican allies in Congress push through the large tax cuts and equally large increases in defense and infrastructure spending that he campaigned on, the implied fiscal stimulus could push growth above 3%. (We won’t mention the big deficits this will incur - ouch.) On the other hand, if the incoming administration prioritizes increasing import duties, the disruptions to critical supply chains could have a chilling effect on business activity. The likelihood of the former, more benign, outcome seems greater than that of the latter, although the change in the outlook for growth would be larger under the latter outcome. For the time being we are penciling in a small fiscal boost, which would add to annualized GDP growth beginning in 3Q17 and extend into 2018. Even with this fiscal stimulus, we only see GDP growth next year getting to 1.9%.
While policy can potentially lift aggregate demand next year, there are fewer reliable remedies for the slow productivity growth that has plagued the economy. This slow productivity growth is the reason that even growth in the neighborhood of 2% has been enough to support a robust need for businesses to keep hiring. And six consecutive years of job creation in excess of two million jobs per year has finally tightened labor markets to the point where we are seeing more convincing evidence of accelerating wage growth, albeit from a low starting point.
Consumer price inflation has only partly followed suit. After averaging 1.4% in 2015, core inflation has recently been running around 1.7%. The continued upward move in wages should put downward pressure on margins and upward pressure on prices, and we see core inflation getting back to the Fed’s target of 2.0% by the end of 2017. The ongoing progress toward the Fed's inflation and employment objectives should keep them on track to slowly normalize short-term interest rates: we look for a hike in December and two more next year.
Digging a little deeper into sector performance, we note the consumer was the mainstay of the economy in 2016, an outcome which we expect will continue in 2017. Although the pace of job growth may be slowing modestly, wage gains are picking up. This vigor in labor income could get added support from tax cuts, further boosting disposable personal income. Household balance sheets remain healthy, supported by ongoing valuation gains in stocks and, particularly, housing, and the appetite for debt growth has remained modest. Consumer sentiment has also been supportive, as households have been mostly unfazed by global stress and political uncertainties. The one fundamental that looks a little less supportive relative to last year is energy prices. The tailwind of earlier declines in retail gas prices helped fuel a spending binge in early 2016 that is moderating a bit as we head into 2017.
More Apple Info
CNBC has noted that “If the company’s massive cash pile was its own company, it would be the seventh largest in the S&P 500 and the 14th largest public company in the world.” This pile is now $238 billion and growing at almost $1 billion a week, so it is well over $240 billion now. We’ve noted many times that that cash can be used to invest in new products, buy other companies or be paid out to stockholders through dividends and stock repurchases. It seems to us that many investors just forget about it. We certainly don’t. We don’t understand. It’s like having a net worth of $1 million and having $400,000 in cash in Ireland. How would YOU feel? We say pretty good!
At current prices, Apple has a PE of about 13, a significant discount to the overall stock market with a PE of 19. The stock didn’t participate in the stock market rally post-election and there seem to be many rumors about why. We don’t think it is necessary to go into them all, as most of them are made-up, meaningless excuses, and in the long run the only thing that matters is where the company is going with new products and increased sales and earnings. We believe they are going in the right direction. The current Christmas quarter is always their best one – they continue to sell iPhones at extraordinary rates
Gilead Sciences News
Stifel Nicolaus initiated coverage on Gilead Sciences (GILD: $75, up 1%) in a research note issued on Monday. The firm set a buy rating and a $100 price target on the biopharmaceutical company’s stock. The price target price would indicate a potential upside of 33% from the company’s current price.
Several other equities analysts have also recently commented on Gilead. Piper Jaffray set a $108 price target and gave the stock a buy rating in a research note in August. Cowen set a $120 price target on the stock in October. RBC Capital Markets reaffirmed an outperform rating and set a $105 price target in July. 10 research firms rate the stock with a hold rating, 19 have assigned a buy rating and two have given a strong buy rating to the company’s stock. Gilead Sciences has a consensus rating of “Buy” and an average price target of $98.
BMR Take: What can we say. We think these analysts are secretly reading The Bull Market Report. We have a Target of $115 on the stock.
Netflix News
Brean Capital began coverage on shares of Netflix (NFLX: $117, up 2%) in a research note issued on Monday. The firm set a $145 price target on the stock. Several other research firms also recently weighed in on Netflix. Cantor Fitzgerald set a $135 target price on October 27th. Guggenheim reissued a “buy” rating and set a $140 target price on October 26th. Finally, FBN Securities reissued an “outperform” rating and set a $130 target price on October 21st. 8 analysts have rated the stock with a sell rating, 13 have issued a hold rating and 30 have given a buy rating to the company.
BMR Take: This stock is not for the weak. It has little in the way of earnings now, but huge potential down the road as it moves into the programming side of TV and movies. We have a price target of $133. And if this price is hit, we think it will go a lot higher in the coming years. But this stock could go to $100 before it gets to $133. In fact, it could go to $80 first. So be careful out there. We hereby change our Sell Price to $105, from “We would not sell Netflix.” Why? Well it all depends on Wall Street. With the Dow at 19,000 everything is rosy. But if the Trump rally fades with the market falling sharply, and the Dow heads to 17,000, this will bring all stocks down harshly. We just want you to be prepared.
A Letter to The Bull Market Report about First Solar
Hi Todd,
Hope you are well. It is hard to watch First Solar (FSLR: $31, up 5%) continue to plummet. I had lost on Solar in the past but bought on your recommendation. I am holding now as you feel it can double over the next year. What do you see as the catalyst?
Thanks.
Richard Reed
We said:
Richard -
First Solar looks sick, yes, but it will come back. It has done so many times in its history. And really, the world is poised for solar installations. But earnings are not going to happen until late 2017 and possibly on into 2018 and in the world of Wall Street this is a long time to wait. And the market will overdo it to the downside, especially now with higher interest rates on the horizon. They always do. So if you have strength and courage, you should stay in. If not, just call it quits. I am very upset about this outcome, Richard.
Todd
Hi Todd,
Thanks for your response. The tough thing for me was I held my nose buying this stock because your thesis made sense. Despite having lost on Solar stocks in the past I thought this may be the time. My tendency is to get out but I continue to hold on your recommendation. You have given up on some stocks recently so I know when you are sufficiently disenchanted you will sell. The question for me at this point is how much lower this will go before the possible upturn. I am assuming you feel that the risk-reward is in favor of holding. Thanks again.
Richard Reed
The Google vs. Amazon Race
Google (GOOG: $761, flat) and Amazon (AMZN: $780, up $20) were neck and neck last week, but look at the results for the past week. Amazon came back with a vengeance to take the lead in this race.
Now we want to add another stock to this complex race. Apple. Apple closed at $112, but they split their stock two years ago 7-1. So multiply by 7 and you have $784, the same price as Amazon. So we are adding Apple to the race. For fun, let’s put a time limit on this race. Let’s pick the end of the first quarter of 2017. Who do you think will win? Send your votes here: Info@BullMarket.com. Who do you think WE believe will win the race?
Tons of Cash Leads to Stock Buybacks
The biggest US companies are set to spend a record amount of cash buying their own shares in 2017, according to Goldman Sachs. Goldman estimates that S&P 500 buyback spending will total $780 billion next year. That would be more than their estimate of $600 billion in 2016, which is on track to be a record. Buybacks reduce the number of outstanding shares, boosting earnings per share. Some say the companies buy their own stock because they think the stock is undervalued, which we tend to agree with.
Goldman thinks the splurge on share repurchases it expects in 2017 will be driven by a 12% increase in total cash use and $2.6 trillion in spending. There’s a lot of cash held overseas and Trump has proposed to cut the rate to 15% from 35%, which Goldman thinks is very likely. And they think that most of the cash repatriated will go towards share repurchases. They even mention a number - $150 billion. That’s a lot of buying power.
Musk Says Tesla’s Solar Shingles Will Cost Less Than a Dumb Roof
Electricity is Just a Bonus
Tesla shareholders approved the acquisition of SolarCity. (85% of them voted yes.) And Chief Executive Officer Elon Musk didn’t take long to make his first big announcement as head of this new enterprise. Minutes after shareholders approved the deal, Musk told the crowd that he had just returned from a meeting with his new solar engineering team. Tesla’s new solar roof product, he proclaimed, will actually cost less to manufacture and install than a traditional roof - even before savings from the power bill. “Electricity,” Musk said, “is just a bonus.”
Well, we are taking this with a grain of salt, but it sure makes good headlines. Musk is making some big comments: He says: So the basic proposition will be: Would you like a roof that looks better than a normal roof, lasts twice as long, costs less and by the way generates electricity? Why would you get anything else?”
The company says that on a large house over a long period of time, the value of that electricity could exceed $100,000.
BMR Take: We’re drinking the Kool-Aid, just like everyone else. That’s why we keep saying that this company is risky and could go to $150 or lower before it goes to $250 and higher. Listen, we love this company and its leader. But again, be careful.
A Word from Gary Jefferson
Jefferson Financial Group
First Vice-President, Investments
UBS Financial Services, Inc.
Bond markets have literally been beaten up since Donald Trump’s election, with 10-year Treasuries currently seeing 2.36% yields (up 30% from the 1.8% range!) and total losses at well over $1 trillion. Last week we wrote that one of the reasons for the plunge was the market discounting a new era of inflation - however, the exact reasons why bond markets are falling were and are still not entirely obvious. Does higher expected inflation really account for the steep rise in yields?
An article last week from Money and Market had some new information into what else is going on. It said that world governments were selling Treasury bonds hand over fist leading up to the election because of yuan-supporting in China and budget reasons in Saudi Arabia, so the market already had a lot of downward momentum. Also, investors may fear inflation, but they also are fearful of another huge pile of Treasury debt. The bottom line with all this is that no matter the reason, there are too many of them. Especially if you believe in any of the old investment maxims such as, "don't fight the Fed", "the trend is your friend", "don't fight the tape", and "don't catch falling knives," etc. Bonds are under pressure and likely to stay so until the new administration's agenda becomes more clearly understood.
In this wonderful new period of optimism for the market, we want to issue one caveat. Let's consider that the entire recovery, at least post 2010, has been built on fake economic data to perpetuate a fake narrative of growth. In other words, it may be much harder for a new administration to get the economy going again because the true condition of it has been "covered up." For example, according to Value Bit News last week, "There is no way on earth that the real unemployment rate is less than 5%. Over 45 million people are on food stamps and over 94 million people are out of the work force. Claiming unemployment is at 5% in the context of these two other data points is like claiming you’re in incredible shape provided you don’t count body fat or cardiovascular health".
It's well known that the US has yet to achieve a single year of 3% GDP growth in the last eight years. Moreover, many analysts say even these weak growth numbers were doctored and that in reality the US’s economy stripped of accounting gimmicks is in fact much worse. What we do know is that the recovery has been weak despite the US spending a truly staggering amount of money.
Again, according to Value Bit News, "During a period in which tax revenues have risen every year since 2009 with record tax revenues hitting in 2013, 2014, 2015 and soon to be 2016, the US Government has still managed to outspend this amount to the tune of $8.1 TRILLION. Put another way, despite the US Government raking in RECORD amounts of tax revenues in the last four years, it still managed to grow the debt by $2.5 trillion. And if you go back to 2009, the debt has grown $8 trillion. And what has the US got to show for it? Let’s be clear here. We’ve spent a staggering amount of money, increasing the US’s Debt to GDP ratio from 77% to 105%, and yet we’ve had the weakest recovery in US economic history…"
Trust in the media is at all-time lows and for good reason. Don't let media "noise" deflect you from staying focused on earnings and quality stocks if the mainstream narrative suddenly reverses in the coming months.
We don't doubt good things are on the way - we're just trying to temper expectations that it will be fast and easy to turn around an economy that probably isn't as strong as we have been led to believe.
Well, that is some powerful stuff to think about, Gary. We look forward to your input each week.
The Dollar and the Euro are Moving Towards Parity
The euro and the U.S. dollar could be trading one-for-one next year as Europe struggles with political uncertainty and the U.S. is expected to go on a fiscal splurge. Goldman Sachs predicted the two currencies will reach parity by the fourth quarter of 2017. The dollar has risen 4.4% against the euro, and 2% against a basket of world currencies since Donald Trump won the U.S. presidential election Nov. 8. The euro is currently trading at $1.06.
Investors have viewed Trump's proposals to spend heavily on infrastructure, while cutting taxes, as a catalyst for further domestic growth and inflation. They're also expecting more interest rate hikes from the Federal Reserve to match rising inflation. Other analysts expect the euro and dollar to reach parity even sooner. Nomura thinks it could hit as soon as six months, which would see parity as early as May. Citigroup said it had shifted its euro-dollar forecast “180 degrees.” The bank now predicts the euro will tumble to 98 cents in the next 6-12 months.
The market is watching Trump like a hawk, and the Fed is doing everything it can to strengthen the dollar, and at the same time the European Central Bank will probably do nothing to support the euro. If the Federal Reserve increases rates, expectations are the dollar would rise further by drawing money to the U.S. looking for higher returns. The European Central Bank, meanwhile, is showing no changes in monetary policy that has pushed rates into negative territory and includes a huge bond-buying program.
We have seen a 10-day losing streak for the euro against the U.S. dollar as we write this over the weekend. In the last two weeks, the euro has fallen 4% against the dollar, hitting $1.06, a level last seen 12 months ago.
Introduced in 1999, the common currency spent much of its early years below parity, falling to as low as 83 cents in 2000, when there was a strong U.S. economy and a weak one in Europe. But the currency has traded above $1 since late 2002, climbing to a high of $1.60 as the U.S. struggled with the financial crisis in 2008.
Goldman expects one interest-rate increase soon from the Fed, followed by three more in 2017, and thinks the ECB will extend its quantitative-easing program to the end of 2017.
Europe has already witnessed one political earthquake this year, when the British surprised investors by voting to leave the European Union. Now, the eurozone’s political diary is full of potential market shocks. Early next month, a constitutional referendum in Italy could sink the government of Prime Minister Matteo Renzi. The resignation of Mr. Renzi, one of Europe’s most reform-minded leaders, could freeze Italy’s economic overhaul and erase the meager growth the country has generated.
Also lining up are key elections in France, Germany and the Netherlands, all of which have seen populist right-wing parties move higher in the polls.
A strong dollar is good for the US, as it draws investment to the country, and it could actually be good for Europe as it makes their goods less expensive here in the US which should increase trade.
The High Yield Report
Due to internet issues, we don’t have the High Yield Report for this week. We will send it out as a News Flash as soon as we are able.
$8.2 billion Withdrawn from Bond funds
Investors withdrew $8.2 billion from U.S. bond funds in the week ending November 16, 2016, the largest outflow since June 2013. Investors have liquidated fixed-income funds more than they have over the past three years. This sell-off has depressed fixed-income fund prices, which have driven up the yields, as there is a negative correlation between the two.
Check out the price action over the past 14 days in several popular fixed-income funds. The iShares Barclays Aggregate Bond Fund (AGG) is down 2.4%, the iShares IBoxx Investment Grade Corporate Bond Fund (LQD) is both down 2%. The iShares iBoxx High Yield Corporate Bond (HYG) fund has rebounded, and is flat. While at first glance that may seem optimistic, recent developments in the junk bond market cause reason for concern.
The high-yield market has been smooth with more than $5 billion in debt issued following the election. High-yield has not been immune to withdrawals as in the three-week period ending November 16, investors liquidated $7.1 billion from junk bond funds, the largest three-week outflow since 2015.
The bottom line is that as long as we continue to see outflows in the fixed-income bond funds, prices will be depressed, and investors will be cautious. As we see a return to higher interest rates there could be an influx of money into U.S. fixed-income as the global hunt for yield continues. In Europe and Japan, pension funds and insurance companies remain hungry for yield, especially given the rise of negative interest rates.
Good Investing,
Todd Shaver
Founder and Editor in Chief
The Bull Market Report
Since 1998
