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February 11, 2018

THE BULL MARKET REPORT for February 12, 2018

by Todd Shaver | Feb 11, 2018 | Weekly Newsletter 7pm Sunday

The Weekly Summary

Volatility is back and in an uproar. We’ll run through what is happening in the markets below, but don’t lose sight that although the backdrop warrants caution, the bull market is alive and well. US equities ended their worst week in two years on a positive note with the Dow up 330 points on Friday, but rate-hike fears that pushed markets down remain in place as investors await inflation figures on Wednesday. The S&P 500 tumbled 5.2% in the week, its steepest slide since early 2016, jolting equity markets from an unprecedented stretch of calm. At one point, stocks were 12% below the highs set just two 11 days ago, before a strong rally Friday left the equity benchmark 1.5% higher on the day.

Still, the selloff has wiped out gains for the year. Signs are mounting that jitters spread to other assets, with measures of market unrest pushing higher junk bonds, emerging-market equities and treasuries. The CBOE Volatility Index ended at 29, almost 3x higher than its level January 26th. We at The Bull Market Report are staying calm. We believe stocks are on sale so we would suggest picking out one or two of your favorites and slowly buying more shares.

No matter what is happening out there, there is always a bull market here at The Bull Market Report! This week we highlight: Blackrock, The Carlyle Group, Synaptics, Tesla, CBRE Group, and Ventas.

Key Market Measures (Friday’s Close)

BMR Companies & Commentary

Blackrock (BLK: $522, down 5%)

BlackRock is trusted to manage more money than any other investment firm. Its business is investing on behalf of clients from large institutions, to parents and grandparents, teachers, nurses, doctors and people from all walks of life who entrust their savings to the firm. Well, the company is getting even bigger.

BlackRock is seeking to raise $10 billion for "BlackRock Long-Term Private Capital" to buy and hold $500 million to $2 billion minority stakes in companies for periods of up to more than a decade. The move establishes BlackRock as a potential competitor to Wall Street private-equity giants like Carlyle Group and Apollo Global Management. It is the first-ever attempt by the world's largest asset manager to make such direct investments.

BlackRock has praised Berkshire Hathaway as the best-known example of the strategy. Well, of course. No one has ever done it better. We all know this. BlackRock Long-Term Private Capital will operate differently from most private equity funds, taking full commitments up front and reinvesting as it exits investments. As compared with most investments that return capital to investors after one deal. This is great for Blackrock shareholders because there is no need for ongoing fundraising.

BMR Take: The rock of the investment management industry right now is Blackrock. The company is going to generate nearly $14 billion of revenue this year and produce about $28.60 of EPS. With revenue and EPS growing to over $15 billion and $32.00 next year, respectively, the stock is far from expensive leaving a lot of room for upside.

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The Carlyle Group (CG: $23, down 10%)

Carlyle delivered a solid quarter. Revenue was $1.0 billion versus just $435 million a year ago. EPS hit $1.01 versus just $0.02 a year ago.

Management discussed how the business concluded 2017 with great momentum across all businesses. Carlyle had record activity deploying $22 billion into new investments and raising $43 billion of capital across the platform. Investment performance was exceptional with 20% appreciation across carry funds enabling realizations of $26 billion that went to investors as proceeds for their investments.

The company declared a quarterly distribution of $0.33 per share on February 21st. For full year 2017, they paid out $1.41. That is nearly a 6% yield at the current price.

BMR Take: In private equity The Carlyle Group is a top-notch franchise, known everywhere, the who’s who of business, doing deals in the top floor offices of every major city. The business is raising money like weeds and generating big returns. It is a very compelling opportunity. EPS should hit $3.00 next year leaving this stock dirt cheap.

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Synaptics (SYNA: $44, up 7% - yes really!)

Synaptics reported revenue of $430 million versus $461 million last year. EPS was $1.11 versus $1.49 a year ago. Not terribly pretty, but Synaptics is starting to benefit from the transition encompassing a more diversified product portfolio and customer base, and expects to see strong momentum from investments in infinity displays and consumer IoT in the second half of this calendar year. They continue to make meaningful strides across core growth priorities within chip-on-film, OLED (organic light-emitting diode*), in-display fingerprint technology, and consumer IoT. This includes retail availability of flagship smartphone products, such as new fingerprint, display, and voice-enabled technologies.

* OLED panels are made from organic (carbon based) materials that emit light when electricity is applied through them. Since OLEDs do not require a backlight and filters (unlike LCD displays), they are more efficient, simpler to make, and much thinner - and in fact can be made flexible and even rollable.

BMR Take: With all of the growth investments happening, and the lucrative opportunity emerging for consumer IoT, the quarter’s results were less important than the outlook for attacking this major opportunity. And the outlook is bright. EPS is expected to ramp from around $4 this year to $5 next year and substantially more in the years ahead. We added the stock at $41 in December and our Price Target is $54 and we are hopeful of seeing this during the current year. It would be helpful in achieving this goal if the market calms down and resumes its bull run.

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Tesla (TSLA: $310, down 9%)

Tesla reported revenue of $3.3 billion this quarter versus $2.3 billion last year. For the full year Tesla did $12 billion versus $7 billion a year ago. EPS this quarter was a loss of $3.04.

However, the big ramp in profitability is on the horizon. Revenue is expected to jump to $20 billion this year and $27 billion next year. EPS is expected to swing from a loss to a positive $3.25 in 24 months.

The stock traded about flat after the earnings release that included a fractional revenue miss, and narrower-than-consensus EPS loss. Gross margins came in 190 basis points below consensus, with the Model 3 production ramp weighing on the overall margin profile. But that didn’t really matter as management reiterated its target of 5,000 Model 3 production units per week by the end of Q2.

BMR Take: Most continue to see many moving parts to the Tesla story, with the guidance for sustainable positive operating profits sometime in 2018 garnering more of a show-me attitude, especially given the checkered track record of not hitting guidance milestones or production targets. However, most agree the healthy demand for the Model 3 continues to be a good problem to have, and are spectators on the pace of production execution.

We put a Sell Price of $335 on the stock a few weeks ago so we don’t lose the tremendous profits we have on the stock, but the market this week smashed most stocks down including Tesla. Our Sell Prices are for YOU to decide what to do.
--- We love the concept of the company.
--- We love Elon Musk (Space X with its new successful launch this week has had positive ramifications on Tesla).
--- We love the cars they make.
--- But the debt is crushing.
--- But they have been able to weather the storm through debt and equity sales.

As we’ve said before, this stock could go to $200 or $500. And we’re not sure which will come first? It is very speculative. Should you be in this stock for the wild ride ahead? Only you can decide.

Here’s a 5-year chart. Pretty impressive:

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CBRE Group (CBG: $42, down 5%)

CBRE is crushing it. The company reported revenue of $4.4 billion versus $3.8 billion last year. EPS was $0.99 up from $0.93 a year ago. The consensus expects this year’s revenue to grow from $14.2 billion to $16.5 billion in 2019. EPS is similarly expected to grow from $2.70 this year to $3.20 in 2019.

Fourth-quarter results capped another excellent year for CBRE. Performance significantly exceeded the expectations discussed on the third-quarter earnings call as some concerns surfaced about occupier outsourcing and leasing fee revenue growth. But all that went to the wayside as revenue and earnings for 2017 ended up reaching all-time highs. 2017 marked the 8th consecutive year of double-digit EPS growth for CBRE.

BMR Take: The macro environment is a supportive backdrop for this business, and management continues to operate within an industry poised for long-term growth. This is due to the growing acceptance of outsourced commercial real estate services, the increasing capital allocation to commercial real estate as an institutional asset class, and the continuing consolidation of activity within the industry to the highest-quality, globally diversified market leaders. CBRE Group is a must-own holding in your portfolio in the real estate sector.

We’re up over 60% in two years on this wonderful firm. No dividend yet, but we can see that coming. Our target is $54 and there’s an outside chance it can hit that this year. We know what this company does first hand – they save big multi-national companies money. Big money as in millions and millions of dollars. And the firm gets rewarded in brokerage fees, fixed fees and more. And so few people know about this great firm.

This chart shows the value this stock offers here, after this rough week:

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Ventas (VTR: $52, down 5%)

Ventas reported revenue for the quarter of $895 million versus $875 million a year ago. Revenue for 2017 ended at $3.6 billion versus $3.4 billion in 2016. EPS was $0.50 versus $0.58 a year ago. EPS for 2017 ended at $1.78 versus $1.86 in 2016. Consensus expects revenue to drift upward toward $3.7 billion over the next 2 years. EPS is expected remain stable around $1.75 although we see several sources of EPS upside that are likely to drive revisions closer to the highest Street forecast of $2.15.

All in all, 2017 was another excellent year for Ventas, as the business generated record cash flow from operations and delivered same-store property cash net operating income growth at the high end of internal expectations. To further enhance their diverse portfolio, the company made nearly $2 billion in value-creating investments, including significant expansion of their university-based life science business. And they profitably disposed of almost $1 billion in assets and completed innovative deals with leading operating partners.

BMR Take: Ventas has proven resilient through cycles for two decades. They remain one of the world's best REITs with a specialty in healthcare among other areas.
This success is founded on solid strategic vision, superior foresight and innovation, intelligent and timely capital allocation decisions, rigorous execution and a cohesive, expert team. As they enter 2018 – the company’s 20th anniversary year – management is confident that they can continue the long track record of superior consistent performance as the industry leader.

We added Ventas at $60 in last 2016, a little over a year ago. Until the last two weeks, it was hovering around $56, down a bit, but still paying a nice 6% dividend. It’s worth $18 billion, and has over 1200 properties across the US, Canada and the UK. And as you know, they are in the senior living business along with medical facilities as well. Yes, the stock is down, but this company is strong, and we can only see good things happening from here. If you bought at $60 now is the time to add to your position to bring your cost down. Two years from now we wouldn’t be surprised to see the stock in the 70s, as remember, 10,000 people a day turn 65 in the US. They have to live somewhere!

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We got a letter from one of our readers about Ventas

From: Richard Reed [mailto:reed995@]
Sent: Wednesday, February 07, 2018 10:21 AM
To: The Bull Market Report <Info@bullmarket.com>
Subject: Re: EARNINGS PREVIEW FOR THE WEEK AHEAD

Hi Todd,
Ventas (VTR) is below your Sell Price. Are you lowering the sell price? Thanks.
Richard

Our answer:
Hi Richard –
Look – they own 1200 assets in the United States, Canada and the UK. The properties are senior living properties and more. Are they all going down the tubes? NO WAY. A $19 billion asset paying 6%. We would buy more.

Furthermore, our Sell Price on Ventas is $58. But at $52, we have to say that we like it even more. Nothing has changed for the company in the past two weeks. Yes, interest rates are a shade higher, but nothing out of the ordinary. When the economy is good, rates go out. This is just normal. So to answer your question above, yes, we are lowering our Sell Price to $48. Of course, YOU can make up your own mind on this one, as always, but we would take this opportunity to buy an amazing company at an even lower price.

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Economic Calendar

CPI Ex-Food & Energy
Wednesday, February 14th, 8:30 AM
Period: January
Consensus: 1.7%
Prior: 1.8%

CPI
Wednesday, February 14th, 8:30 AM
Period: January
Consensus: 1.9%
Prior: 2.1%

PPI
Thursday, February 15th, 8:30 AM
Period: January
Consensus: 2.5%
Prior: 2.6%

Housing Starts
Friday, February 16th, 8:30 AM
Period: January
Consensus: 3.7%
Prior: -8.2%

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Apple has $285 Billion in Cash

Can you believe this? Again – a record high for any company in history. Apple (AAPL: $156, flat for the week) has $285 billion in cash, or $56 a share. With the stock at $156, that’s 36% of each share of stock in cash. We’re not sure of the Wall St. record, but we are guessing this is twice as much than any other company in history. With the stock flat for the week (amazing) this just screams out at us to add more to the portfolio.

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If the Market Heads Back Up

No one knows where the market is heading. Will it calm down and move higher this coming week and month? Or will it be heading for 23,000 and lower? Again, we don’t know. But if things simmer down and the volatility abates – AND IT WILL – there are a few stocks that we would want to add to our positions in. Here are just a few:
Microsoft
PayPal
Google
Facebook
Apple
Eli Lilly

Yes, many of these are the super Tech stocks that have been leading the market. But guess what? These stocks will continue to lead the market for many years to come.

And one more note. Did you see Annaly Capital Mortgage (NLY: $10.21, down 1%) this week? Solid as a rock. So if you are super worried about things, we believe Annaly can be a store of value for a month or two or 12, and you can enjoy the 11% dividend in this $12 billion market cap company.

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A Word from Gary Jefferson

Jefferson Financial Group
First Vice-President, Investments
UBS Financial Services, Inc.

There was no comment Monday or Tuesday because everything I wrote was outdated and the numbers were obsolete within minutes of writing, rewriting and re-rewriting them. The dust may or may not have settled, but a few things are much clearer today.
In short, the seismic swings over the past few days have been based on three primary factors that we believe now form a consensus:
1. The threat of higher inflation (Rising bond yields)
2. The possibility of more Fed hikes
3. The long streak without a normal and healthy market shakeout.

How does that stack up against the best economy we've seen in over a decade? In other words, is it good news or bad news that economic growth is so strong the Fed may have to raise rates sooner than expected? Or, is it good news or bad news that nearly half the companies in the S&P 500 have reported fourth quarter results and more than 80% of them have beaten Wall Street's revenue expectations, the highest percentage since the third quarter of 2008? And, is it good news or bad news that the tax law will boost those profits further in the quarters ahead?

Let's put all this in perspective:

First, the market isn’t overbought anymore. We now know that. There was a "10% correction." Let’s get over it.
Second, earnings are robust.

Third, the rise in bond yields has been a headwind, but it’s not signaling a looming recession. Importantly, the 10-year vs. 2-year Treasury yield spread has widened out as yields have risen, implying the bond market is now discounting higher inflation and better economic growth, which over the medium term has almost always been positive for stocks.

While volatility has returned with a vengeance, the market fundamentals are now better and earnings growth prospects haven't looked better in years. Basically, all of the reasons why investors have been bullish on the market last week, last month and last year are still here.

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The High Yield Report
by Michael Foster
VP High Yield

It should always be emphasized that much of a stock's action is not caused by only the underlying company, but also by the industry and the overall market. In a volatile environment, this emphasis is especially important. While our High Yield and REIT portfolios have shown lackluster performance over the past two weeks, the fundamental aspects of the companies that make up the portfolios have not changed.

The S&P 500 decreased 5.1% over the past week, leading to stocks officially being in correction territory. Much of the decline is being attributed to interest rate and liquidity fears, which is why much of the analysis on the portfolio below will focus on those aspects. It takes just one week to rattle bullish sentiment. As an investor, you should not put too much weight on what the general financial media is discussing. What should take priority is thinking about whether the fundamental aspects of the economy and market have changed. When this is the priority, our fear diminishes as we realize that earnings are still strong, nonfarm payrolls on February 2nd were above expectations, and a deregulatory environment is still present.

One metric, the yield curve, is worth looking at though. The spread between the 10-year Treasury yield and the 2-year Treasury yield has been constantly decreasing as a result of the Federal Reserve tightening policies and the lack of inflation. On a basic level, you can note that the presence of an inverted yield curve, if it were to happen, has been a common predictor of past recessions. Going deeper, the economic repercussions of the inversion are much more important. Consumers and banks are directly impacted. For consumers, the cost of credit increases, which leads to a larger portion of expendable income being dedicated to servicing debt. For banks, the spread between long-dated loans and deposits decreases, which leads to worse financial performance. We’re sharing this information so that you can keep the yield curve on your radar, but there’s no need to worry as of now. When the curve inverted in the past, it still took between 7 to 24 months to reach any sort of recessionary state.

AllianzGI Equity & Convertible Income Fund (NIE: $20.59, down 4%) fared slightly better than the S&P’s drop of over 5%. It moved from the weekly low of $19.50 to its current level after recovering about 2.5% in the last hour of trading on Friday. The performance of individual equities which it holds, including Microsoft, Alphabet, and Amazon, led to the recovery in the last hour. Given that the fund invests little in the bonds and the scenario of the inverted yield curve, we can expect the funds to be shifted from Equity to Bonds.

We still see Apollo Commercial RE Finance (ARI: $17.70, down 3%) as a cyclical play on the U.S. commercial real estate sector. Given that commercial real estate in the U.S. remains solid, with Apollo’s loan originations hitting $1.5 billion YTD and the economy of the US continuing to get stronger and stronger, Apollo is not a position to be worried about.

Digital Realty Trust (DLR: $102, down 5%) dropped almost by the same amount as the S&P. This was the opposite of the week prior, where the company maintained strength in the midst of widespread declines. While we noted the continued demand for data centers in the last summary, there are some other metrics to note. Digital Realty, owning many data centers in US and internationally, is affected by rising interest rates as the cost of borrowing rises. The company has a massive debt level of $5.8 billion with a Debt/EBITDA ratio of 22. Rising interest rates could cripple the company’s dividend payout and future prospects.

Invesco Municipal Trust (VKQ: $11.83, flat) ended up at the same level as the beginning of the week. With its investments primarily in investment grade U.S. municipal bond obligations (85%), the fund can expect to yield better returns amidst the current rising interest rates scenario. Also, a Fitch report stating that plans to cut federal funds to them won't impact the revenues of the municipal bond funds and ETFs, played a large part in keeping the fund’s price level stable. Nuveen Municipal (NVG: $14.43, flat), another high yield fund with major investments in U.S. investment grade municipal bonds, also maintained its price level.

Pimco Dynamic Fund (PDI: $30, down 1%) was less volatile. The firm, investing primarily in a range of debt securities, including mortgage-backed securities, high yield corporates, and emerging market bonds, could witness further issues with rising interest rates, changes in tax structure, and better yields.

The REIT sector has been partially impacted by the recent economic data, heightening fears of higher interest rates. Primarily, the sector is engaged in massive borrowings, and rising interest rates could increase the cost of the borrowings. With that said, rising interest rates often occur in a booming economy, which indicates higher demand by consumers.

Market corrections generally provide prudent investors with great buying opportunities. One way of going about this is finding relative strength in strong industries. Applying this analysis to REITs, the overall REIT sector was down only 3%. Within out portfolio, three of the five positions outperformed the sector. Annaly Capital Management (NLY: $10.21, down 1%), Government Properties (GOV: $16.37, down 1%), and Omega Healthcare Investors (OHI: $26, flat) composed that group.

As a company that primarily engages in buying mortgages and mortgage-backed securities (as well as other assets), Annaly could fare very well as interest rates go up and correspondingly coupon rates do as well. While this is not necessarily the reason for the less-than-average drop this week, going forward it is something we will keep in mind. Both Government Properties and Omega should not feel a significantly negative impact by rising rates either. The former gets offered attractive rates by the government as a result of its leases and the latter’s healthcare-related real estate is, for the most part, unaffected by the business cycles.

The other two positions, Ventas (VTR: $52, down 5%) and Welltower (HCN: $55, down 5%), ended up having declines that were in-line with the S&P 500 but larger than the move in the REIT sector.

Ventas reported positive 4th quarter earnings on Friday, which provided a minor boost to the stock. The reported income from continuing operations for 2017, $640,000, was a record for the company. In turn, the EPS and FFO per share numbers were also records. In a rising rate environment, this is a positive sign. With the earnings report occurring during a stock market decline, any overall S&P bounce should result in outperformance by Ventas.

The other relatively weak company, Welltower, did not have any news this week to explain the larger than average decline in the stock. As it is focused on owning senior living properties and funding real estate infrastructure, the large amount of debt maintained could pose an issue within the rising rate environment. Currently, though, the extensive track record of stock appreciation over the past 25 years leaves us unworried. Welltower is also at the lower end of its range for the past four years, so it is a good area to pick up more shares.

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

February 4, 2018

THE BULL MARKET REPORT for February 5, 2018

by Todd Shaver | Feb 4, 2018 | Weekly Newsletter 7pm Sunday

The Weekly Summary

The stock market took a hit this week. It was down almost 200 on Monday, almost 400 on Tuesday, rallied a tad on Wednesday and Thursday, and got hammered on Friday to the tune of 666 points. It’s a week we can happily say has been put to bed and we can now forget about it. The long-awaited correction has now occurred. Happy now Wall Street pundits? (We don’t feel this way.) The big reason for the sell-off was interest rates. The 10-year was up again to 2.84%. And the 30-year moved up above 3%. But this is what happens when you have a strong economy – interest rates move up. This has been happening for over 100 years. The economy shines; interest rates go up. Why do you think rates have been so low? Because the Fed drove down rates after the debacle of 2008-2009 and kept them there for almost 10 years. Look at this chart here; it’s a bit hard to read at first – note that the right column shows the rate today – 1.48% and in 2008 it was 1.04%.

Now take a look at these two charts. The first one is the 10-year Treasury for the past six months. It's gone straight up.

And this one is the 10-year for the past 20 years. Basically straight down.

The key takeaway here is the interest rates are STILL VERY LOW HISTORICALLY. This is actually good news for the economy and stocks. Thus it is our take that 1) We had a bad week last week 2) Things will calm down this week and in the coming months, and 3) Good solid companies will continue to thrive and grow as the US economy continues to strengthen.

Easy for us to say. Hard for you to implement. We understand that. But we want you to put this past weekly move in perspective. The market is where it was just three weeks ago, at 25,500. A year ago it was at 20,000.

The big oil companies came up a bit short on the earnings front last week. Most of the Street was expecting good things, as the price of crude has remained strong at $65. But Exxon’s production dropped by 130,000 barrels a day and has lost money now for 12 quarters a row on its US drilling business, even as US production touched the record production of 10 million barrels a day in November, the previous record being set in 1970. Plus they took a $1.3 billion write-down on its natural gas business. But overall, Exxon made $3.73 billion, a decline of just 2%. These big companies are expected to generate huge amounts of cash in 2018, so we aren’t feeling too sorry for them. The number could be over $40 billion, in excess of dividends and new spending.

Super Bowl Sunday is here! $5 million for a 30 seconds ad. Over 110 million viewers likely watched. The legacy of Tom Brady’s Patriots against the surprisingly better than you think Eagles. The Patriots are favored by 4.5 points. It is interesting. Very often in sports or in the markets whatever people expect to happen, doesn’t materialize. For all sorts of reasons: Cognitive dissonance. Conservative bias. Confirmation bias. Extrapolating past performance. Loss aversion. Overconfidence. Self-control. Regret aversion. Affinity. Status quo. The list of mental mistakes people make when investing is long and always at play. We saw a 666 point drop on the Dow on Friday. This was the 3rd largest one-day point decline in history. The market is digesting something. The Bull & Bear indicator managed by Merrill Lynch has finally flashed a firm sell signal after weeks of overextended conditions. We will see what happens Monday. The unexpected could happen. Just like in football.

No matter what is happening out there, there is always a bull market here at The Bull Market Report! This week we highlight: Microsoft, Google, Amazon, Facebook, PayPal, and Blackstone.

Key Market Measures

BMR Companies & Commentary

Microsoft (MSFT: $92, down 2%)

Revenue was $28.9 billion and increased 12%. EPS hit a solid $0.96 crushing the $0.87 consensus. This quarter’s results speak to the differentiated value Microsoft is delivering to customers across productivity solutions and as the hybrid cloud provider of choice. The firm’s investments in IoT, data, and AI services across cloud, position the business to further accelerate growth. In particular, Microsoft delivered another strong quarter with commercial cloud revenue growing 56% year-over-year to $5.3 billion, which is just amazing to see such a huge growth figure in the lucrative cloud opportunity. Guidance for Q3 was largely in-line or better than consensus expectations. All in all, a very good quarter.

BMR Take: Microsoft is a stock market darling. The business is well-rounded. Legacy Window products to the up and coming Azure product in commercial cloud. We see Microsoft continuing to piece together solid earnings results in the year ahead. With $4.25 of EPS in direct sight, the stock still screens reasonable at around 22x.

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Google (GOOG: $1,112, down 5%)

Revenue of $32 billion increased 24% from a year ago. EPS of $9.70 just missed the consensus for $10.00. Overall, we are interpreting the quarter’s results favorably (unlike the Street.) Mobile and desktop search along with YouTube are powering accelerating growth and these trends should drive sustained above average growth going forward. Google Cloud momentum is good now generating $1 billion in revenue per quarter, where the number of $1 million or more contracts across cloud products tripled in 2017. Google has now sold ‘tens of millions’ of its Mini, Max, and Chromecast devices as Google Assistant is now on over 400 million devices globally. Waymo’s progress is accelerating. They plan to launch a ride-sharing program in Phoenix operated by self-driving cars this year. Wow.

BMR Take: We really don’t care much about the slight EPS miss. The stock being down is an opportunity to accumulate shares. Scouring through all the analysis on the quarter, nobody is really saying anything that seriously concerns us. What we want to see going forward is more progress on the cloud business. Amazon AWS is now at 35% market share versus Google Cloud only in the high single digits. If Google can close that gap, this stock can continue its strong move higher. With nearly $50 of EPS coming into view, the current valuation of 23x is far from stretched.

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Amazon (AMZN: $1,430, up 2%)

Amazon is crushing it. What else is new? (!) Net sales increased 38% to $60 billion in the fourth quarter, compared with $44 billion in 4Q16. EPS of $6.15 was well above $4.90 a year ago. There is so much to discuss here. What we are really excited about is the Echo business. Earlier in the year Amazon introduced three new Echo devices: the all-new Echo ($100), featuring a new design, improved sound, a lower price, and a choice of colors to personalize your device; Echo Plus ($150) with a built-in smart home hub so customers can easily set up and control their smart home devices; and Echo Spot ($130), a compact Echo with a screen so you can see the weather, get the news with a video flash briefing, view lyrics with Amazon Music, watch a camera monitor, browse and listen to Audible, and more.

This new business opportunity could be huge. Said Jeff Bezos, Amazon founder and CEO, “Our 2017 projections for Alexa were very optimistic, and we far exceeded them. We don’t see positive surprises of this magnitude very often — expect us to double down. We’ve reached an important point where other companies and developers are accelerating adoption of Alexa. There are now over 30,000 skills from outside developers; customers can control more than 4,000 smart home devices from 1,200 unique brands with Alexa; and we’re seeing strong response to our new far-field voice kit for manufacturers. Much more to come and a huge thank you to our customers and partners.”

While Amazon doesn’t break out the financials on Alexa and its other electronics business, the results from its cloud-computing business, Amazon Web Services (AWS), were obvious and contributed much more to the company’s record profit total. AWS saw revenue shoot 45% higher to $5.1 billion, with profits of $1.3 billion. Wow – that’s 26% after tax. AWS and the tax gain of $790 million for the changes in the U.S. tax code, which lowers Amazon’s tax rate to 21%, were the biggest contributors to the company’s overall net income of $1.86 billion. Watch for a possible spin-off of the cloud business sometime this year. Can you imagine what this will do to the stock? Does “shoot higher” ring in your head?

BMR Take: Look, when Jeff Bezos gets surprised by how good a business is doing, and says he is doubling down, you have to take note. But don’t just take note. Take action on it too. You have to have Amazon in your portfolio. You can’t look at the business on current revenue or earnings and say it’s cheap or expensive. It’s an innovation machine. They are constantly doing start-ups, like Echo. More new paid members joined Prime in 2017 than any previous year — both worldwide and in the US. The business is roaring with momentum and still has a very bright future ahead even at the current stock price level.

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Facebook (FB: $190, flat)

Flat for the week. Not bad in the whole scheme of things. Facebook increased revenue 47% to $13 billion. EPS of $1.44 was up 19%. What a good quarter frankly. Though while 2017 was a strong year for Facebook, it was also a hard one," said Mark Zuckerberg, Facebook founder and CEO. "In 2018, we're focused on making sure Facebook isn't just fun to use, but also good for people's well-being and for society. We're doing this by encouraging meaningful connections between people rather than passive consumption of content. Already last quarter, we made changes to show fewer viral videos to make sure people's time is well spent. In total, we made changes that reduced time spent on Facebook by roughly 50 million hours every day. By focusing on meaningful connections, our community and business will be stronger over the long term."

Some analysts were scrambling a bit to figure out what this all mean. But monthly active users increased 14% from a year ago to 2.13 billion. Essentially, the issue is that Facebook has had a huge growth engine coming from adding users. Seriously 2.2 billion users is huge. The runway here is slowing down and that means Facebook is going to have to find another way to take over the world. And that is what Zuckerberg is saying. They will be focusing on quality of usage and fully monetizing existing users.

BMR Take: The company is look at EPS growing from $5.40 in 2017 to $8.70 in 2019. It is not easy to find a 20% earnings growth story. We really like the global platform Facebook has built and all the future opportunities it creates for advertising and other revenue opportunities. We see the same story here as elsewhere in large cap tech, trading for 22x is just not stretched.

The stock hit a new all-time high of $195 on Thursday and even traded at $194 on Friday, before the deluge. What a great company.
Stay the course.

Look at this 5-year chart. Where do you think it is headed, as it moves to 2.5 billion users?

Active Users Chart

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PayPal (PYPL: $77, down 10%)

PayPal delivered strong numbers. Revenue increased 26% to $3.7 billion. EPS increased 57% to $0.50. Overall, PayPal had a transformative year in 2017. The company brought record numbers of new customer accounts to the platform by simplifying life for consumers and merchants.

PayPal also substantially expanded its opportunities for future growth and redefined its competitive position through successful partnership strategies. For example, PayPal and Synchrony Financial announced an agreement expanding their consumer credit relationship. Under the terms of the transaction, Synchrony Financial will acquire PayPal's U.S. consumer credit receivables portfolio, which totaled approximately $6.4 billion at the end of 2017.

BMR Take: So why is the stock down? PayPal and eBay have signed a term sheet to make PayPal available as a way to pay on eBay, through July 2023. But the fact that PayPal’s exclusivity on eBay is going away has people up in arms. This aspect of the PayPal and eBay relationship has been well-discussed and should not surprise people. Don’t let it fool you.

We look at PayPal like this. This quarter new customers increased 9 million up to 227 million total customers. Facebook has over 2 billion users. With time PayPal could look a lot more like Facebook. That means massive growth still lies ahead. We believe in riding this train. We are talking about the next gen MasterCard or Visa here. A 10% drop in the stock is a good opportunity to take advantage of.

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The Blackstone Group (BX: $35, down 4%)

Total revenue ended the year at $7 billion up 39% from last year. EPS of $2.21 compared to just $1.56 a year ago, a huge 42% jump. This business is grooving! It was another strong quarter of core business trends. Specifically, total assets under management increased an elevated 12% sequentially to a record $435 billion, driven primarily by $62 billion of inflows. Capital deployment of $20 billion in the quarter represented a record. And dry powder remained elevated at $95 billion, which bodes well for future capital deployment levels. Just to put that in perspective, Blackstone realized half of the $7 billion of revenue this year from carried interest on prior year inflows, that were deployed to generate big gains of which Blackstone gets a percentage of the profits.

You are telling me the company has $95 billion to put to work to do more of this? Let’s assume on average they can collect a 10% carry on that money. They just doubled the business.

BMR Take: It was a truly exceptional year for Blackstone, reflected by outstanding earnings growth and record capital activity that drove their highest-ever level of aggregate cash distributions to shareholders. Blackstone’s tireless drive to innovate has enabled the company to launch large-scale new product areas that reach a wider client base and serve existing clients in new ways. Our investors in turn have entrusted the company with more capital than ever before, leading to a new record total assets under management of $435 billion, up 18% year-over-year. The stock is a good value at just 10x the current EPS of $3.25.

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Economic Calendar

Total Light Vehicle Sales
Monday, February 5th, 10:00 AM
Period: January
Consensus: 17.2 million
Prior: 17.8 million

Consumer Credit
Wednesday, February 7th, 3:00 PM
Period: December
Consensus: $19.5 billion
Prior: $28.0 billion

Initial Claims
Thursday, February 8th 8:30 AM
Period: February 3rd
Consensus: 233,000
Prior: 230,000

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Apple Reports Earnings
Apple (AAPL: $161, down 6%) sold 77 million iPhones in the holiday quarter. Apple’s forecast for the next quarter was also lighter than expected. Apple says they expect to sell 50 million iPhones this quarter, slightly lower than the Street expected, and this equates to slightly lower revenue and the main reason the stock got hammered last week.

Apple still blew past its own and analysts’ expectations for revenue and profit for its fiscal first quarter, reporting record sales of $88.3 billion and net income of slightly more than $20 billion. The company was able to increase revenue by 13% year-over-year by increasing iPhone prices and generating more money from the people buying Apple’s smartphones.

Apple jacked up the price on its premium iPhone X smartphone, starting the 10th-anniversary model at $1,000, pushing the average selling price, or ASP, of an iPhone far higher than analysts had ever experienced. IPhone buyers paid an average of more than $796 for their phones in Apple’s fiscal first quarter; iPhone ASP had never previously topped $700.
Apple also boosted its software and services segment revenue 18% year-over-year in the quarter to $8.5 billion. And listen to this:The App Store, Apple Music, iCloud and Apple Pay all had their biggest quarters ever.

Apple said, “During the week beginning Dec. 24, a record number of customers made purchases or downloaded apps from the App Store, spending $900 million in that 7-day period, followed by $300 million in purchases on New Year’s Day alone.”

“Other products” revenue grew the biggest of all. This includes smartphone accessories like the Apple Watch, which grew sales 50% year-over-year for the fourth consecutive quarter, as well as AirPods. Revenue hit $5.5 billion by selling such hardware, up 36% more than a year ago.
Apple is capitalizing on the opportunity at hand by producing more money out of iPhone users in every way possible. Apple is making more money on each iPhone, selling a few accessories to go with it, then signing up iPhone users for monthly subscription plans for services such as Apple Music and iCloud.

If Apple Music continues to grow at its current rate, it will officially overtake Spotify this summer as the streaming world's number one service. Apple Music has a monthly growth rate of around 5%. Spotify has a growth rate of just around 2%. If that keeps up, Apple Music will officially bump Spotify off the top in summer - and there's no reason to believe it can't, given that part of Apple's success in building an audience for Apple Music lies in the fact that the service comes bundled with most of the major devices the company sells.
BMR Take: The all-time high of $180 was hit January 18th. Two weeks ago the stock was down $7 and last week $11. Looks like a sale is going on in shares of this great company. Wait until that overseas cash starts hitting the books here in the US.

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VMware (VMW: $123) is Wrapped Up in a Dell Move

One way or the other it’s time to move on from VMware. Why? Dell Technologies owns 80% of the company and is discussing in the press whether to have VMware buy Dell in order for Dell to go public. It’s a back door tactic very rarely, if ever used before. It has impacted VMware greatly because no one really knows how it is going to play out. It looks like VMware might end up owning Dell, creating a behemoth Tech company consisting of Dell, VMware and EMC, plus a host of other tech businesses like cloud computing and cybersecurity. This might be a good investment, but little is known of its financials at this time, so we feel it best to wait and see how things shake out.
VMware was much higher a week ago, and Wall Street is quite nervous because it doesn’t really understand what is going on. The Street doesn’t like uncertainty, remember? (!)

BMR Take: We added the stock a year ago at $83 and we are up a shade under 50%. We think that’s a nice return (a GREAT return) and with everything going on with these new moves by Dell, we think it is time to take profits, sit on the sidelines and watch. Dell may be a stock to buy someday after they go public, but we will leave that decision for another day.

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The High Yield Corner
By Michael Foster
Vice President of High Yield

After the S&P 500’s 2% drop on Friday, which has inspired headlines such as “stocks have worst decline in 2 years”, it’s easy to lose sight of the fact that the S&P 500 is up 3.4% YTD.

Before the decline, stocks were up 7.5%, so a drop was clearly necessary [so they say.] Investors who have gotten comfortable with a bull market may be a little scared, because they aren’t used to down days. And it’s easy to forget what is driving the bull market. Wages are up nearly 3% in the U.S., unemployment keeps dropping, corporate earnings are rising, and, perhaps most impressively, this strong economy is being mirrored around the world. The typically cautious IMF and World Bank have asserted that growth is strong around the world, and while these institutions have made a lot of blunders in the past, they aren’t SO euphoric as to bring out the contrarian bear in us.

For high yield, the cautions are amplified. Riskier income producers like Government Properties Income Trust (GOV: $16.65, down 7%) and AllianzGI Equity & Convertible Fund (NIE: $21, down 5%) are down heavy, although they operate in very different markets and are entirely different asset classes (REITs versus convertible bonds and covered-call stocks). To wit: the AllianzGI’s 5% decline on the stock is far steeper than its 2.9% NAV decline, which is itself slightly better than the S&P 500’s 3.2%. Now, of course we can’t read too heavily into short-term price movements, but at the very least this tells us something about the AllianzGI Fund: it is not making extremely risky bets on very volatile assets, so it isn’t in any danger right now. So why did it sell off in excess of its NAV selloff? You got it. Because of fear. And that’s why the fund remains a buy. It’s up 1.6% for the year, lagging the overall market by a bit.

And what about Government Properties Trust (GOV: $16.65, down 7%)? We recommended this REIT back in 2016 and although the REIT is down 7% since then on a price return basis, much more importantly its dividend has not been cut since then, and investors have actually gotten cash dividends of about 19% on their original investment since our recommendation. As a result, we’ve made a profit on a total return basis. And the dynamics of the fund haven’t changed. The REIT’s FFO over the last 12 months is $2.28, while the dividend is $1.72. Thus its FFO is 133% of dividend payouts, so it’s out-earning its dividend. There is no threat to the dividend stream in the short term, and rising rents thanks to a booming economy mean FFO will go up, resulting in even higher FFO coverage.

The income stream here is not at any risk, despite the implications of the recent absurd sell-off. Revenues have been rising by about 8%, so we don’t see any indication that revenues can’t support the current dividend payout. For this reason, there’s no reason to be more cautious about Government Properties, and plenty of reason to shrug off the recent price declines. In fact, it is a great time to add more to this very stable company that is absurdly undervalued.

Elsewhere in REITs, declines were much less severe. Only Omega Healthcare Investors (OHI: $26, down 3%) saw a decline in-line with the S&P 500, but that’s not surprising. We’ve discussed at length why this company’s dividend hikes are threatened, but the threat won’t materialize for years (we’ve estimated 5 years). Dips are buying opportunities for now, as long as investors are cognizant of the fact that the dividend hikes won’t last forever and the stock could sell off in a few years as a result. But if you want a strong and secure high income stream now, Omega is one way to do it.

Digital Realty Trust (DLR: $108) was the second-best investment in the Bull Market Report High Yield portfolio. It was flat for the week. That sounds bad, especially if you’ve gotten used to gains upon gains and few down days, which has been the market norm since the High Yield portfolio began in 2016. But it also shows, interestingly, that the market has a lot of confidence in Digital Realty (which also outperformed a lot of the Tech sector). This week, Amazon, Apple, and Alphabet reported earnings that proved the world’s demand for data centers isn’t going away. Alas, Digital Realty’s yield is tiny, but as an investment in a good company, it’s a great option for investors.

Apollo Commercial Real Estate (ARI: $18.14, down 1%), Ventas, (VTR: $54, down 3%), and Welltower (HCN: $58, down 3%) all saw slight declines, which we can consider to be more a result of REIT investors following the broader market trend. No big news came from any of these companies last week to warrant the selloff.

Similarly, AstraZeneca (AZN: $36, down 2%) fell a lot less than the broader market after weeks of strength in the Biopharma sector. AstraZeneca has not released any major news and there wasn’t any major sector announcements. We can dismiss this 2% decline as being relatively good in a week of short-term worriers cutting bets on all kinds of things more because of fear than for any fundamental reason.

Now, on to municipal bonds. The end-of-year sell-off in this asset class in anticipation of 2018’s rate cuts meant that these funds were attractively priced for income investors, and we still think long-term capital gains are in the cards. What we need to see is the market get used to our new Fed Chairman. While Janet Yellen did a wonderful job of managing monetary policy and bringing the Fed funds rate closer to historical norms, the job isn’t done. Jay Powell has already said that he will continue in the same mode. And that will limit enthusiasm for municipal bonds. that is, until the booming economy results in higher tax revenues for municipalities that, in turn, results in credit upgrades and thus increasing NAVs for our muni Closed End Funds. The timing on this eventuality is unclear, but there is good reason to be confident that it will happen eventually. Nuveen AMT-Free Municipal Credit Fund (NVG: $14.48, down 3%) and Invesco Municipal Trust (VKQ: $11.83, down 4%) are worth holding for the tax-free income as we wait.

PIMCO Dynamic Income Fund (PDI: $30) is the only High Yield holding to be up for the week, and for that we are grateful! But just as there’s little to read into the short-term declines, the short-term gain here isn’t a reason to celebrate. The market is all about short-term emotion-driven trading. If anything, the fact that the panic didn’t hit the Pimco fund may indicate that no matter how crazy the broader market is, we aren’t in full-blown panic mode. And that, quite possibly, could mean this correction won’t last very long.

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

January 28, 2018

THE BULL MARKET REPORT for January 29, 2018

by Todd Shaver | Jan 28, 2018 | Weekly Newsletter 7pm Sunday

The Weekly Summary

The big news this week was Davos. Davos is an annual event hosted by the World Economic Forum that’s mission is to improve the state of the world by engaging business, political, academic, and other leaders of society to share global, regional and industry agendas. Davos is a mountain resort in the Alps of Switzerland. All of the top brass from companies and countries attend. Trump rocked the party with his message of America first. He said America first does not mean America alone, and that America is open for business. He promoted our 3% GDP growth, our massive tax reform, and our historic reduction in regulation. We put a billionaire in office exactly to do this. The S&P 500 is already up 6% so far this year and Trump’s deals in Davos could drive gains higher.

No matter what is happening out there, there is always a bull market here at The Bull Market Report! This week we highlight: Gilead, Shopify, Bristol Myers, Nutanix, Google, and Tesla.

Key Market Measures

BMR Companies & Commentary

Gilead (GILD: $86, up 6%)

Gilead has had a tough time since 2015; however, its fortunes may finally be changing. The big event is that Celgene is buying Juno Therapeutics for a 50% premium. One of Juno’s most promising drugs directly competes with Gilead. Clearly, Gilead is playing in the right sandbox. The Wall Street research firm Jefferies poured some gas on the fire of excitement now burning for Gilead. They upgraded the stock this week and said to look for good things to happen soon. The company is looking at a February approval and launch of a drug for HIV, and highlighted some key Phase 3 data on another drug to be released by 2019.

BMR Take: The stock appears to be inexpensive at this level, as it trades at just 8x this year’s EPS of $8.70. But we know that earnings are set to decline to $6.50-$7.25 over the next few years as Gilead’s top two drugs face declining sales. These two drugs were among the top three best sellers of all time – but nothing lasts forever. Could Gilead fetch 15-20x EPS when the dust settles and new drugs re-invigorate some excitement? Possibly, but it’s going to take quite some time.

As you may remember, we had the stock in our portfolio and removed it a year ago as we were tired of waiting. It took a year to come back, but from here we think the run is over for at least the next few years. We will remain on the sidelines.

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Shopify (SHOP: $129, up 12%)

Somebody stopped by Shopify this week to work on collaboration for the future of augmented reality. Tim Cook. CEO of Apple. No big deal. (HA!) He praised the companies “profound” emerging technology. No further explanation needed. Apple + Shopify = $1.8 billion added to Shopfy’s market cap, now at $13 billion. Wow.

BMR Take: Tim Cook met with developers and coders and listened to demonstrations. Augmented and virtual reality is a major part of Apple’s future plans. These markets are likely to balloon to $215 billion by just 2021. Maybe Apple works with Shopify. Maybe Apple buys Shopify. Either way we see this all leading to good things ahead for Shopify. Their sales are expected to grow from $660 million this year to $1.6 billion by 2020, without factoring in anything from the possibilities with Apple.

Andrew Left of Citron is crying in his beer. (He’s the guy who shorted the stock at $119 and made a big deal about it in the press. He drove it down to $92, and now is losing money big-time. YES!!! We don't like the way this guy operates.) Remember, if you hear that a stock is heavily shorted, that’s a BULLISH signal. Why? Because after you short a stock the only thing you can do from that point on is to BUY THE STOCK BACK. Very bullish.

Look at this chart:

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Bristol-Myers Squibb (BMY: $64, up 3%)

Bristol-Myers received a big regulatory approval in Europe this week. The European Commission (EC) expanded the indication of Yervoy to include treatment of advanced melanoma in pediatric patients. The EC approval marks Bristol-Myers’ first pediatric indication for an Immuno-Oncology medicine in the European Union and allows for the marketing of Yervoy for this indication in all 28 Member States of the EU. This is just a key development for geographic market expansion and ultimately sales. Hip hip hooray!

BMR Take: Bristol-Myers is a leader in Immuno-Oncology. This space is red hot. Bristol’s EPS is expected to grow from $3.00 this year to $4.00 in 24 months. This Healthcare bellwether is overdue for a breakout in the stock. Remember, activist Carl Icahn is making some noise here and pushing for good things for all shareholders.

Looking at the 1-year chart, you can see that it is a slow mover, but steadily up. We’ll take that any day. The company is no small firm. The market cap is $105 billion and the stock is moving towards its all-time high of $74 set two years ago.

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Nutanix (NTNX: $33, down 8%)

Nutanix caught some heat this week from a downgrade at JP Morgan. The report said nothing specific. They said: The market rally has gone on for eight long years. Valuations aren’t cheap. Nutanix is up a lot lately.

We say: Ignore this report – it appears to be just one person’s opinion. We believe there is more money to be made here. In fact, just this week Nutanix spoke to investors about how hosting providers like Amazon Web Services are taking steps to work with customers more broadly to support bare services, expanding the market opportunity for Nutanix.

BMR Take: Nutanix is a must-own stock. “The opportunity of a decade,” says Goldman Sachs. The customer base has doubled in 18 months. The average annual sales per customer is expanding from $1 million to $5 million, fueling greater than 30% top line growth. And we could see this $5 billion market cap company get bought by the likes of an IBM or Oracle any day. The stock is down this week to where it was in December. But in October, just three months ago, it was $22. Stay on this train!

THE BULL MARKET REPORT for January 8, 2018

by Todd Shaver | Jan 7, 2018 | Weekly Newsletter 7pm Sunday

The Weekly Summary

Welcome to the New Year! As we begin 2018 we want to first say the capital markets will not always be this friendly to us. We are up against too many horses and mysterious dark forces. So let’s all make sure we enjoy these times. The recent and current times will be remembered as the good old days of the greatest bull market ever recorded in human history.

You have probably noticed that we at The Bull Market Report don’t make prognostications very often. People ask us all the time where the market is going and whether this bull market will come crashing down, and whether this is the time to sell, sell, sell. The problem is that we are in the “no one knows” camp. Anyone who predicts future stock price moves is just guessing. Now, we look at the numbers and base our research and comments on how we see things economically, for the country, the world and for the individual company we are writing about. But if you think we can predict the day the bull market ends, you are mistaken. No one can.

So, what does one do? Well, we have said many times this past year, if you are nervous, then take some profits off the table. Put them in the high yield sector. We have two fabulous portfolios of companies that are stable and are paying strong dividends, to the tune of 6-8% and higher. We, personally like equities and we like the economic numbers that this country is producing, so we wish to stay invested in the companies that are thriving from this strong economy. If and when things turn down, we’ll give you our opinion and you can make those important decisions as they apply to your own personal portfolio, and the financial health of you and your family.

Now to the investing. We read and review countless expert stock market outlooks for you on the topic of what will happen in 2018. While views differ on various things, and nobody has a crystal ball, there is one prevalent belief that institutional investors are positioning for. Essentially everybody is saying that international stocks are the place to be when analyzing the valuations of the marketplace. Now look we are not going to recommend purchase of China Construction Bank or anything of the sort. We instead favor the plenty of great US companies with international revenues. This year keep an eye out in particular for multi-national stocks. Fundamentally, they are positioned to outperform.

No matter what is happening out there, there is always a bull market here at The Bull Market Report! This week we highlight: Microsoft, Google, Amazon, Facebook, Carlyle Group, and Mazor Robotics.

BMR Companies & Commentary

Microsoft (MSFT: $88, up 3%)

One of the biggest things happening right now is US tax reform. Microsoft is sitting front and center. While a lower cash repatriation tax rate in the GOP's tax-reform bill may encourage large tech companies to bring home large amounts of cash currently held abroad, it is unclear how they may deploy those assets. Many worry it will not be used for new investments or higher wages, but simply returned to shareholders. We’re not worrying one bit. We expect the majority of it to indeed go to shareholders, that’s us!

While there has also been a sense that the surge in repatriated assets could spark an M&A boom, these tech companies have hardly been shy about using low interest rates and strong cash flows to fund acquisitions. Some $630 billion is held by the nine tech companies with the largest overseas holdings. Accordingly, we think the freed-up cash is likely to flow toward stock buybacks, paying down debt, and dividends.

For Microsoft, they have over $130 billion of cash parked internationally. After paying the 15.5% tax or $20 billion tax bill, we believe Microsoft will proceed to steadily hike the current dividend rather than pay a one-time special dividend that could be as much as $3. Either way, this is good news for income-oriented equity investors.

BMR Take: Microsoft is currently paying a $1.67 dividend. The consensus outlook calls for $1.81 in 2019 and $1.95 in 2020. This dividend action alone is likely to keep pushing the stock upward. Microsoft remains a core holding for us.

Microsoft was given a new $100 price target on by analysts at Royal Bank of Canada and by Oppenheimer Holdings last week. We have a Target of $92 on the stock and can’t WAIT to raise the Target to $101 when it hits $92.

Not a bad 6-months chart, don’t you think?
Where do you think Microsoft is heading in the next six?

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Google (GOOG: $1,102, up 5%)

China is the largest consumer market of any country in the world: With 1.4 billion citizens and counting, it has 19% of the global population. This has drawn the attention of some of the world's largest companies seeking to capitalize on its rich opportunities. Even more enticing are its 750 million internet users, many of whom are part of the country's emerging middle class.

A number of U.S. technology companies have been effectively shut out of China's growing internet market, including Google. Chinese regulators took to the podium at the Internet Governance Forum in Geneva recently and said Google would now be welcome. This is fabulous news for the company.

After four years there, Google announced in 2010 that it would no longer censor its Chinese search site, effectively banning itself from the country. This self-imposed exile followed what the company called a "highly sophisticated" hack, which resulted in the theft of intellectual property and attempts to gain access to gmail accounts belonging to human-rights activists.

The changing outlook for growth in China could be huge for Google.

BMR Take: Google’s EPS outlook is $32 for 2017 heading to $41.50 in 2018 and $48 in 2019. This is 29% and 17% EPS growth, respectively, without any material surge in business in China. If we get the upside from China, look out. The runway for earnings growth could be longer than the Great Wall of China.

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Amazon (AMZN: $1,229, up 5%)

At this week's Consumer Electronics Show, we're going to see the battle between Amazon Alexa and Google Assistant kick in to high gear.

Last year, Alexa was the clear winner of CES, with companies like Ford, Huawei, and LG agreeing to integrate their products with Amazon's virtual assistant. Since then, Alexa has only gotten bigger — over the holiday season, Amazon says that it sold "tens of millions" of Alexa-enabled products, led by its own Amazon Echo Dot.

This year, Google is striking back. While the search giant's Google Home speakers still lag the Amazon Echo in terms of market share, it's picking up momentum: Google claims that it sold over 6.7 million Home and Home Mini speakers over the holiday shopping season.

You can expect both companies to make announcements about new partners, new products, and new ways to use their respective voice agents. LG has already announced that it will be showing off new TVs with Google Assistant built in; a company called Vuzix will be debuting a pair of Alexa-powered smart glasses.

Amazon got in on the smart speaker market early, and has moved quickly to ensure its stays out in front. By most measures, the Amazon Echo is dominating the smart speaker market. This could be a great driver of future earnings growth so we are watching closely.

BMR Take: This week we wanted to present a bit of a different perspective on Amazon. The view is Mark Cuban’s. He says you can’t even value Amazon on revenue or earnings like other publicly traded stocks. Essentially Amazon is one massive start-up with scale. You know when they bought Whole Foods the market cap of Amazon went up so much that day the increased value covered the purchase price of Whole Foods. They literally bought Whole Foods with no capital. So you see this innovation machine can’t even be analyzed like other businesses out there. You just have to own it. It’s the innovation machine that will lead the way wherever technology and the world go. The Amazon Dot is just the latest example of innovation.

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Facebook (FB: $187, up 6%)

The company's founder and CEO Mark Zuckerberg posted his annual personal memo on Thursday — mostly about being a better CEO — but one throwaway reference to cryptocurrency technology captured everyone’s attention.

Writing about how the last year saw many people lose trust in social media and tech companies, Zuckerberg noted the growing importance of de-centralizing forces, like the rise of cryptocurrency. He said, "There are important counter-trends to this — like encryption and cryptocurrency — that take power from centralized systems and put it back into people's hands. But they come with the risk of being harder to control. I'm interested to go deeper and study the positive and negative aspects of these technologies, and how best to use them in our services."

Zuckerberg was referring to bitcoin. It is telling that Zuckerberg specifically called out cryptocurrency in his annual new year's resolution post. When you look at the broader landscape of social media companies and messaging platforms, it makes perfect sense that Facebook would be paying very close attention to such technology.

First, consider that nearly 100% of Facebook's revenue comes from online advertising. This figure shouldn't be all that surprising — the social network has long been one of the single most dominant players in digital advertising. Still, the company would be foolish not to pursue other meaningful revenue sources long-term. Adopting some kind of cryptocurrency plan could be one way to do that. But rather than buying into one that's already established, like bitcoin, what might be more likely is Facebook creating its own. Who better to pull off a legit crypto currency than Facebook?

BMR Take: Facebook is going to generate about $6 of EPS this year. We are looking at EPS growing to $10 by 2020. Layer into this the possibilities of a proprietary Facebook coin and look out, this could be a stock set to surge even more than it already has on bitcoin mania.

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The Carlyle Group (CG: $24, up 5%)

Carlyle Group has brought on a new leader of its U.S. capital markets division. Matthew Savino was named managing director and head of U.S. capital markets. It is a new position. Mr. Savino works with Carlyle's U.S.-based corporate private equity executives on publicly syndicated and privately placed loan, bond and equity offerings for portfolio companies. Mr. Savino was a managing director and global head of alternatives sourcing at BlackRock.

Why does this matter? Private equity is all about sourcing deals. That is the business model. Exclusive deal sourcing is the key to the fabulous earnings we see. And getting this done is all about good people. Let’s review a few of the heavy hitters on the board. This company is stacked with talent.

Mr. D’Aniello is a founder and Chairman Emeritus. Prior to forming Carlyle in 1987, Mr. D'Aniello was a Vice President for Finance and Development at Marriott Corporation where he was responsible for valuation of all major mergers, acquisition, divestitures, debt and equity offerings, and project financings.

Mr. Conway is a founder and Co-Executive Chairman and is also the firm’s Co-Chief Investment Officer. Prior to co-founding Carlyle in 1987, Mr. Conway worked at MCI Communications from 1981 to 1987, serving as Chief Financial Officer.

Kewsong Lee is a Co-Chief Executive Officer. Mr. Lee also serves as the Head of the Global Credit segment and is Chairman of the Executive Group. Prior to joining Carlyle in 2013, Mr. Lee was a partner at Warburg Pincus and a member of the firm’s Executive Management Group.

Ms. Lawton Fitt is a member of the Board of Directors. Ms. Fitt is currently a director of Ciena Corporation and The Progressive Corporation. She was an investment banker with Goldman Sachs, where she was a partner and a managing director. She retired from Goldman Sachs in 2002. Ms. Fitt is a former director of ARM Holdings and Thomson Reuters

Tony Welters is a member of the Board of Directors. Mr. Welters is Executive Chairman of the Black Ivy Group. He recently retired as Senior Adviser to the Office of the CEO of UnitedHealth Group having served in such position since 2014.

BMR Take: With the S&P 500 index trading at 20x earnings, we just can't explain why Carlyle trades at 8x earnings. There is no reason for such a massive discount. This stock needs to be a lot higher. Others overlooking the stock creates your opportunity. If we had a category for stock of the year (2018), this one would be at the top of the list. The consensus calls for nearly $3.00 of EPS this year! This company is way undervalued. Repeat – WAY UNDERVALUED.

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Mazor Robotics (MZOR: $56, up 10%)

Mazor Robotics is a pioneer and a leader in the field of surgical robotic systems. In September the company announced CE Mark approval for its Mazor X Surgical Assurance Platform. The CE Mark allows Mazor and its commercial partner, Medtronic, to market the Mazor X in the European Union, as well as other countries that recognize the CE Mark.

This is big stuff and we saw the benefits last quarter when Medtronic essentially sold almost all of the company’s new orders.

Receipt of the CE Mark is an important step in the plan to expand the patient, surgeon and hospital benefits of the Mazor X Surgical Assurance Platform to the European market. The commercial partner for the Mazor X, Medtronic, will be responsible for marketing and selling the system in Europe and they have a great footprint and brand to do so.

BMR Take: Mazor shares increased 150% in 2017 and we think the momentum is going to continue. The company is coming off of a record 3Q17 earnings where it was announced that orders were received for 22 systems comprised of 19 Mazor X and 3 Renaissance. Medtronic was responsible for 11 of the 19 Mazor X purchase orders, which is only the second phase of the commercial agreement, where additional orders are in the pipeline to occur. There is just clear surgeon interest in everything Mazor is doing. Why? When you step back and think of it, this is the start of artificial intelligence and robots beginning to increase productivity. Mazor is at the center of the action in the medical technology sector where the advancement will change lives, and the economic opportunity for investors will be lucrative.

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Economic Calendar

Consumer Credit
Monday, January 8th, 3:00 PM
Period: November
Consensus: $18.5 billion
Prior: $20.5 billion

JOLTS Job Openings
Tuesday, January 9th, 10:00 AM
Period: November
Consensus: 6,025,000
Prior: 5,996,000

Wholesale Inventories SA M/M
Wednesday, January 10th, 10:00 AM
Period: NOV
Consensus: 0.70%
Prior: 0.70%

PPI ex-Food & Energy
Thursday, January 11th, 8:30 AM
Period: December
Consensus: 2.5%
Prior: 2.4%

CPI ex-Food & Energy
Friday, January 12th, 8:30 AM
Period: December
Consensus: 1.7%
Prior: 1.7%

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Oil Holds Near Two-Year High. US Shatters Production Record

The Permian Basin* has shattered its 1973 record to produce 815 million barrels of oil during 2017, or more than 2.25 million barrels a day. The previous peak of 790 million barrels was set 44 years ago. The huge oil field is projected to push total U.S. oil output to a new all-time high by the end of this year. Some analysts see total US production exceeding 10.5 million barrels per day by the end of 2018.

*The Permian Basin is located in the western part of Texas and the southeastern part of New Mexico. It reaches from just south of Lubbock, to just south of Midland and Odessa, extending westward into the southeastern part of New Mexico.

Oil prices are expected to keep rising in 2018 on the back of OPEC-led production cuts and a growing global economy. Most analysts see oil trading in the high 50s for 2018.

The U.S. total rig count will reach above 1,000 rigs in 2018, for the first time since 2015, according to one oil analyst. Rig counts ranged from 660 to 960 in 2017. The current level is 925.

BMR Take: The best way to take advantage of the robust Energy market is with our portfolio item, iShares US Energy ETF (IYE: $41, up 4%). We’ve had this stock in our portfolio since September and it is up 11%, but we feel it has a long way to go higher. It’s a small fund, with just $1 billion in assets, paying a 2.7% dividend, and it is diversified nicely among many strong Energy companies. Exxon is #1, with 23% of the portfolio invested in this global leader. Chevron is #2 at 15%, Schlumberger is at 6%, ConocoPhillips is at 4%, and other companies, like Valero and Kinder Morgan are held as well. Our Target is $44, but we can see this one hitting $50 in 2018 if crude holds or goes higher than its current level of $60.

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Some Target Updates

Visa (V: $119, up 4%) had its price target raised by analysts at Susquehanna Bancshares from $126to $148 last week. Our Target is $123, and we can’t wait to raise our Target into the $130s. The way the market is going, it might just hit our Target this week.

Apple (AAPL: $175, up 4%) was given a new $180.00 price target on by analysts at Rosenblatt Securities. We think this firm has its head in the sand. Our Target is $194 which is when the stock will hit $1 trillion in market cap.

Omega Healthcare Investors (OHI: $27, down 2%) Director Bernard J. Korman bought 100,000 shares stock just before Christmas. The shares were bought at an average cost of $26.90 per share, for a total transaction of $2,700,000. Following the transaction, the director now owns 900,000 shares, valued at $24 million.

We always like to see these types of transactions – management buying stock with their own money. The stock is paying a 9.7% dividend. It is below our Sell Price by $1, but we aren’t going to remove the stock just yet. With their more than 900 nursing facilities and assisted living facilities in the US and UK, we believe the firm to be solid as a rock. Worried about the bull market ending? (we aren’t….), then lighten up some of your portfolio and buy some Omega. You’ll be glad you did.

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The High Yield Corner
By Michael Foster

We saw some significant macroeconomic news stories over the last couple of weeks that are very important for high yield. They’re important because they’re easily misunderstood, but not because they’ll have a huge impact on high yield assets.

Quite the opposite, in fact. What is happening right now is a blip that means little for the high yield world, although it may be a bigger deal for some pockets (most notably Energy and Utilities). Beyond that, however, what’s happening right now really doesn’t matter for high yield.

What are we talking about?

The first is the polar vortex. If you’re on the east coast or in the midwest, you know what we’re talking about. We were working in New York City for the 2013-2014 polar vortex, and we must admit we are still a little traumatized by the experience. The biting wind, the endless cold, the layers of snow covering more layers of snow was enough to make us leave NYC. We still feel bad for friends who were stuck at banks and hedge funds, unable to leave the Big Frozen Apple.

Beyond this malaise with the cold, the broader economy was suffering. The American economy saw a 0.1% GDP growth rate, and the S&P 500 barely ended the quarter in the green (January of that year saw a 3.6% decline in the stock market). The polar vortex put a freezing chill on the 30% S&P 500 return that 2013 enjoyed.

It seems like history is repeating itself. After the S&P 500 rose 22% in 2017, we’re suddenly hit with a cold snap to start 2018. The stock market hasn’t responded to this yet, and we doubt it will. Enough people remember 2014 to know that a sudden freeze isn’t enough to hit stocks.

However, the high yield market is a lot more volatile and easily scared. We’ve already seen at the retail level, fund outflows at several major high yield ETFs in the first few days of January. And many popular high yield assets are starting 2018 in the red.

For instance, look at REITs. Omega Healthcare Investors (OHI: $27, down 2%), Government Properties Income Trust (GOV: $17.86, down 4%), Digital Realty Trust (DLR: $112, down 1%), and Apollo Commercial Real Estate (ARI: $18.30, down 1%) are all weak in the first week of January. We may see more declines in the future as retail investors remember 2014 and pull out—while also forgetting that markets adapt and counterbalance recent tendencies. Trends last only until they don’t.

So much for the first big trend hitting high yield—it’s definitely worth ignoring, or going against. As these REITs slip on cold weather panic, buying opportunities become bigger as yields go higher.

The second big news story for high yield is much, much more obscure, but is arguably more important. Morgan Stanley quietly recommended to clients that investors avoid junk bonds. Here’s what he wrote:

"While the tax cuts just enacted in the U.S. may lead to better growth in the short term, they may also bring forth the excesses we typically see before a recession—which is something credit markets figure out before equities. We recently took our remaining high yield positions to zero as we prepare for deterioration in lower-quality earnings in the U.S. led by lower operating margins.”

In other words, tax cuts cause short-term gains but are long-term negative for economic growth. This is Wall Street and mainstream economic orthodoxy (Goldman Sachs said something similar nearly a year ago when Trump’s tax cut plans were first getting started). That long-term negative is really, really bad for high yield bonds. Why? Because short-term economic growth encourages bad businesses to expand really fast, which means they will go bankrupt faster and at a bigger scale when the economy reverses course and starts to crash.

Morgan Stanley rightly observes this conventional fact about financial markets, but they wrongly assert that it’s a risk that is around the corner.

One of the big problems for macroeconomic analysts is understanding that the 2007-2009 recession was so deep, and the recovery so slow, that the business cycle and the credit cycle are prolongated. Instead of the 7-10 year business cycles of the 80's, 90's, and early 2000’s, we’re now facing a new longer cycle that will be far longer than a decade long.

So Morgan Stanley is right to suggest that we’ll see a boom in high yield credit now only to see a big crash later. But they’re wrong to suggest that big crash is coming this year or even next year.

How long will it take for that big crash? Honestly, it’s too early to tell. It may happen in 2020, or it could happen much later—say 2025 or beyond. There’s still damage to repair from 2007-2009 before we get to bubbly territory.

That means pulling out of high yield right now is premature. Sure, you can pull out now to avoid a big loss in 5 years, but you’ll also miss out on 20% gains in the next year.

That’s why AllianzGI Equity & Convertible (NIE: $22, up 2%) and PIMCO Dynamic Income Fund (PDI: $30, flat) remain holds for now, but investors need to prepare to sell in the next couple of years. And if the high yield market reacts to Morgan Stanley and sells off in the next month, it might even be a good time to buy more now and wait for the market to truly look, feel, and act like a bubble.

So far so good for high yield, despite growing misplaced fears. In fact, those misplaced fears are making me feel better about high yield, because it proves we haven’t hit irrational exuberance territory yet. And when that comes, I’ll quickly change my tune.

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

December 21, 2017

THE BULL MARKET REPORT for Christmas 2017

by Todd Shaver | Dec 21, 2017 | Monthly Newsletter Daily 12pm if new

The Weekly Summary

Star Wars ‘The Last Jedi’ topped $100 million on opening weekend, only the second film to do it, the first being Star Wars ‘The Force Awakens’. Americans are feeling good right now watching movies and buying Christmas gifts, as all-time high equity markets have their portfolios in great shape. Mergers and acquisitions are popping off with Disney buying assets from Fox and several other big-name deals announced this week. These are great times. It has been an incredible bull market. In fact, they say this past year was the least volatile on record in a hundred years. From the depths of the Financial Crisis to today marks an amazing journey for the markets. We can’t help but keep stressing that it won’t always be this good.

We’re not worried – just watching. We heard a presentation from a research specialist from Citibank on Thursday and he talked about and gave us charts on where the market is historically. He said the PE of the market (S&P 500) is 26, way above the historical average of 16. He said the VIX (^VIX) is sitting at about 10, way below the historical average of 14 or so. And he said the market ALWAYS REVERTS TO THE HISTORICAL MEAN. We took this all in, have thought about it for days and much before that and we must say that we effectively agree with this analysis. Remember the phrase “the new normal”? They said this about Internet stocks in 1999-2000 – remember what happened. They said that about the bull market leading up to 2008. Remember what happened. And they are saying that about this bull market and the low interest rate environment that we have seen for decades, with the 10-year Treasury still at historic lows of 2.35%.

Again, we’re not worried – but we are watching. We think this bull can run for another two years at a minimum.

No matter what is happening out there, there is always a bull market here at The Bull Market Report! This week we highlight some of our favorite stocks where we think you can still make good money, including: Bristol-Myers Squibb, Nutanix, Annaly, Tesla, Twilio and asset managers (Blackstone, BlackRock, and Carlyle Group).

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BMR Companies & Commentary

Asset Managers:
Blackstone (BX: $33)
BlackRock (BLK: $517)
The Carlyle Group (CG: $22)

Asset managers sure look like a compelling place to put money to work. We highlight some of the key data points about current market conditions. The strong fundamentals point to more and more money being made on Wall Street, which means more money for asset managers, and in turn more money for the investors in asset managers, meaning you of course.

Investment banking data were mixed in the week. Equity underwriting volume was 12% above the 4Q17 weekly average, and announced M&A volume was 67% above the 4Q17 weekly average, while completed M&A and debt underwriting were 45% and 20% below the 4Q17 weekly average, respectively; debt underwriting is steady.

Equity trading volume was 8% above the 4Q17 weekly average level, while equity option volume was 10% below the 4Q17 weekly average.

Corporate bond trading volume was steady. The 10-year Treasury yield increased 1 bp to 2.38% (up 4 bps quarter to date (QTD)), the Bank of America U.S. High yield increased 3 bps (up 32 bps QTD), and MBS securities yields (15-year and 30-year) declined 3 bps and 0 bps, respectively (up 14 bps and up 4 bps QTD, respectively).

Equity fund outflows (on a one-week lag) persisted, totaling $3.6B ($36B QTD), while bond fund inflows (also on a one-week lag) continued, totaling $4.3B ($52.0B QTD). This is certainly not good and amazing that the stock market has been able to absorb this negative news and rally like it has.

BMR Take: Take your pick between Blackstone, BlackRock, and The Carlyle Group, or own them all. These companies make money from all of the fees, deals, and rising asset prices. They are a center of profits. We see opportunity for meaningful stock price appreciation if current fundamental trends persist, as we believe it will. They are WAY UNDERVALUED in our opinion.

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Bristol-Myers Squibb (BMY: $61)

Bristol-Myers Squibb has licensed a phase 1 immuno-oncology drug from Japan’s Ono in a $40 million upfront pact. This geographically complex deal, which builds on a collaboration the pair have had for a number of years now, sees Bristol-Myers solely responsible for the development, manufacturing and commercialization of Ono’s selective Prostaglandin E2 receptor 4 antagonist. This program is aimed at targeting immuno-suppressive factors in the tumor microenvironment.

To improve long-term outcomes for more patients with cancer, Bristol believes more immuno-oncology-based combinations may be required, and they are pleased to continue the long-standing collaboration with Ono with this focus in mind. This new program offers the potential to develop targeted therapies that counteract the effects of an immunosuppressive tumor microenvironment. Researching Prostaglandin E2 receptor antagonists in combination with the oncology portfolio has the potential to result in an enhanced response in a broad range of tumors.

BMR Take: Bristol is going to generate $3.00 of EPS this year and around $3.25 next year, then growing toward $4.50 by 2020 as the immune-oncology drugs gain traction. That means the stock is dirt cheap and now is a great entry point. Remember, activist investor Carl Icahn is in the stock and we could see him push for a sale of the company resulting in a huge M&A premium some day in the future.

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Nutanix (NTNX: $35, up 3% last week)

Wow, Nutanix has doubled in recent months. Got your attention now? Let’s review what’s happening.

Nutanix started out as a hyperconverged (HCI) vendor. Starting in 2009, they created the market for HCI. They thought that HCI was a step in the journey to where organizations were headed, which was around becoming truly enterprise cloud software companies. This is what you hear and see Nutanix focusing all their energy on. Nutanix customers are looking at HCI as a critical step in this new era journey. They're looking at Nutanix as a full stack offering that allows them to build this platform, above, that's beyond storage and compute and includes virtualization. It helps them with networking, security, but most importantly now helps them with the transition that's happening in the market around the world of multiple clouds, where customers are trying to figure out how to handle a hybrid cloud environment, where customers want to put some of their workloads in the public cloud, but they also have a private cloud infrastructure that gives them the security that actually is probably even more cost effective for their enterprise apps like SAP, Microsoft and Splunk.

BMR Take: Look, we can’t explain all the finer details around the inner workings of HCI. However, we know that tech-savvy people are thrilled about what is going on at Nutanix. The company is on track to swing from losses to over $1 of EPS in 2021. The company’s customer base has doubled. The stock has doubled. We see all the elements of success and continue to like the stock at this level.

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Annaly Capital Mortgage (NLY: $12.01, up 2%)

The Fed raised rates and guess what, Annaly’s stock went up. What? The company is going to be able to navigate the interest-rate environment just fine. In fact, the Chairman of the Board just bought 125,000 shares this week at $12. At the end of the day, it’s been proven by numerous studies, that following insider buying from key business leaders is a way to make money in the markets. People sell stocks for all sorts of reasons, but they only buy stocks with one thought in mind, “I am going to make money on this purchase.” When that buyer is the Chairman of the Board with all that insight and industry expertise, you have to assume either this guy is a reckless idiot with his money or he is on to something.

Who is Denahan J. Wellington? She is Chairman of the Board of Directors and Executive Chairman of Annaly. Ms. Denahan is a co-founder of Annaly and has over 20 years of financial services experience. She was one of the co-founders of Annaly in 1994 and has been with the firm all this time. Ms. Denahan holds a B.A. in Finance from Florida State University and is the third-highest paid female CEO making over $26 million a year.

BMR Take: We see value in Annaly shares which are trading just above book value of $11.20 with a dividend yield of 10%. We think placing your capital alongside Ms. Denahan is a smart move. We have to say we love this company. We’ve loved them for about 20 years through high interest rate environments, through bull and bear equity markets, through negative naysayers both personally and on the Street, and they just keep coming through year after year. Sorry for gushing!

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Tesla (TSLA: $329, up 9%)

Tesla looks to be catching a break in Congress, as electric vehicle tax breaks appear to be maintained in the current legislation.

House and Senate negotiators have agreed to spare the electric-vehicle tax credit and wind production tax credit in their compromise package, according to a Republican familiar with the process. As part of the $1.5 trillion House tax bill, the $7,500 electric-vehicle tax credit would have been eliminated and the wind production tax credit would have been curtailed. The Senate bill didn’t do either, and that is part of the package set for release.

The vehicle tax credit, adopted as part of the 2009 stimulus bill, helps automakers from Detroit to Yokohama bet big on an electric future with plans to spend billions of dollars on new pure-electric models to be rolled-out in the coming years despite limited sales of the vehicles to-date. Availability of the credit has been capped at the first 200,000 qualifying vehicles sold by each manufacturer. No automaker has reached that cap yet. Tesla sold about 127,000 Model S sedans and Model X sport utility vehicles through August.

BMR Take: The tax credit is a nice incentive for sales of Tesla vehicles. More sales means more cash flow. More cash flow means a greater franchise value on the stock. We like what we see happening with Tesla, from innovation to DC policies. Keep this stock tucked away in your portfolio (but know that is one of your most speculative holdings.)

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Economic Calendar

Initial Claims
Thursday, December 21st, 10 AM
Period: 12/16
Actual: N/A
Consensus: 235,000
Prior: 225,000

New Home Sales
Friday, December 22nd, 10 AM
Period: November
Actual: N/A
Consensus: 655,000
Prior: 685,000

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Update on Twilio (TWLO: $25, up 3%)

Twilio hosted its first-ever investor day two weeks ago. Despite many quarters of strong results, the stock has remained under pressure.

Twilio aims to be the "future of communications," the way other cloud platforms like AWS has reshaped compute infrastructure and Stripe has revolutionized payments.

Twilio addresses a huge marketplace and has the potential to scale into a much larger company than it is today. The company continues to grow at a 40% rate, even as it approaches a $500 million run-rate.

Twilio's gross margin is much lower than most software companies due to its position of being a "middleman" between developers and telecom networks. The rise of possible competition from services like AWS is a concern.
Based on research from Gartner, the leading software industry analyst, Twilio believes its opportunity in communications to be 40% of the global IT market ($3.6 trillion).

Twilio also reminded investors that its sales model is unique among enterprise software companies by focusing on software developers rather than enterprise CIOs, attributing to its lower spending on sales and marketing. In its most recent quarter, it spent just 23% of its revenues on sales and marketing. This is low compared to the majority of high-growth software companies, that can typically spend upwards of 50% of revenues on sales and marketing.

Twilio also plans to greatly expand its count of quota-carrying reps (QCRs). At the end of 2016, Twilio's sales organization only had 23% of its headcount as QCRs - indicating that the bulk of the company's new sales hires weren't fully ramped yet to the $1.5-$2 million in revenue that the typical QCR brings in. At the end of 2017, however, Twilio estimates that 46% of its sales organization will be QCRs. This will drive further growth in the company.

Revenue guidance calls for $104 million, a strong 25% growth rate. More good news is that active developer accounts are up 35% over last year, and customer retention rate is literally close to 100%.
The company has generated 56% in gross margins year-to-date, the company believes it can attain gross margins of up to 65% in the long term. Twilio is operating at near-breakeven now, but the company expects to attain an operating margin of at least 20% in the future.

BMR Take: We are hanging tough with this great company. Patience will win out in the end, as revenues drive all.

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Cryptocurrency Update
Bitcoin (BTC-USD, $15,100 – prices change by the minute and trade 24-7)

The bitcoin boom is raging. It’s being discussed on every news network, in every paper, and even in questions asked to the Chairman of the Federal Reserve. The bitcoin rage is best exemplified by the following tale, which is a true story. Erik Finman invested a $1,000 cash gift from his grandmother into bitcoin six years ago. He was 12 years old. Erik is now a millionaire at 18. There are dozens and dozens of these situations being reported. Bitcoin has turned into a full-blown frenzy. It is said that the wealth created in bitcoin has served as an economic stimulus for millennials. Many feel that it going much higher The future of digital gold is here. The end of government controlled fiat money manipulation is upon us. That is what they are saying. But some more cautious investors are saying we will look back and call this the obvious bitcoin bubble. Will we? Only time will tell. Either way the frenzy is an exciting dynamic rarely seen in the markets. Place your bets wisely on the future of cryptocurrencies.

If you wish to learn more about bitcoin and other cryptocurrencies, go to www.Bitcoin.com and sign up for their daily newsletter. Also, www.CoinTelegraph.com has a great one. For info on the 1300 ICOs – Initial Coin Offerings – go to www.CoinMarketCap.com.

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

The year is basically over and we will leave it with the following comments on what may lie ahead. The only thing we can be sure of next year is that the vast majority of predictions or forecasts will end up missing the mark to one degree or another, as the market never follows a predictable pattern or does what everyone, especially the experts, expect. The bottom line to all the following information is simply this - Investors should not get all worked up about the numbers or economic forecasts for 2018. We believe the single most important economic fact that investors need to know is that the world is doing OK.

The current UBS "technical" forecast:
[Be prepared for some serious technical jargon.]

“It is remains our contention that the confusion within the US equity markets, pitting the bulls against the bears, lies in the lack of understanding by investors and traders about the significance of the two current powerful but competing market trends. That is, there is a maturing/aging cyclical bull trend (March 2009) operating within a newly confirmed structural bull trend (secular bull markets last an average of 8 to 20 years in length) that began in earnest in May 2013 via a breakout above 1,576/1,600, which was further validated in 2016 by a positive outside year. As with all cyclical trends, the current 9-year cyclical bull will likely end as early as the second half of 2018 and possibly into early 2019. This will be followed by either a deep correction (10–20%) or by a cyclical bear decline (20–30%) rather than by another structural bear decline (30%-plus). Since the current structural bull trend is only four years old, this long-term trend can sustain for another four years (2021) and possibly extend for another 16 years under ideal conditions. This would imply that the S&P 500 may quickly achieve our technical target of 2,850 as early as the first half of 2018 and possibly overshooting to 3,000 before sustaining a major drawdown. Under the backdrop of a structural bull trend, the S&P 500 can reach an optimistic technical target as high as 3,685 in the years ahead."

Thus, under a worst-case scenario where this new secular bull market which began in 2013 only lasts the minimum 8 years instead of the maximum 20 years - therefore lasting another four years - the technicians are forecasting the S&P 500 could reach 3685 over that 4 year period. This would equate to about 40% upside or 10% annually. However, trying to time this projected correction or cyclical bear decline in later 2018 or the first half of 2019 (or reaching the level of 2994-3045) will be nearly impossible, and could cause timers to miss an important move higher.

Keep in mind that this is a "technical" forecast based on charting and technical historical patterns. It is one of many tools used by money managers in reaching their final investment strategy and asset allocation decisions.
The UBS "fundamental" forecast also offers a positive outlook:

“US stocks rarely experience a sustained downturn outside of economic recessions. In fact, since 1960, the median S&P 500 calendar year total return is 15% in non-recession years. While gains in 2018 are unlikely to match the advance of this past year, US equities should continue to rise and outperform bonds as the US and global economic expansion continues. Historically, stocks rise 88% of the time in non-recession years.

2017 review: Solid S&P 500 EPS growth of 10% underpinned US equities in 2017. Market gains were amplified by higher valuations driven by strengthening and synchronized global growth and inflation generally undershooting market expectations.

2018 outlook. We forecast 2018 S&P 500 EPS to rise another 8% to $141 if tax reform is not passed. With expected tax reform benefits, profits could get an additional 6-10% boost. Solid and steady economic growth and still-low interest rates should continue to support above-average market valuations, although we are not assuming further multiple expansions. Putting it all together, we expect that the S&P 500 will end 2018 between 2,850 and 2,950 if tax reform legislation is enacted. Should tax reform efforts fail, 2,600-2,700 is a more likely base case."

At this point we are going to assume that tax reform happens. Thus, the read we get on the economy is overwhelmingly positive. Maybe it's the Christmas Spirit, but it seems there’s so much going on right now that investors should celebrate. We just had two consecutive quarters of 3%+ GDP growth. We have historically low interest rates which make it cheaper for consumers and businesses and the government to borrow and spend. Inflation, which is a great enemy of both bond and stock investors, has been kept in check through many things such as demographics and technology innovation. We have cheap energy thanks to the technological revolution in fracking and horizontal drilling, and, most importantly, we have rising corporate profits. Ultimately, as they have for all of history, share prices will follow earnings.

So, if you look at this confluence of events: strong economic growth, strong corporate profit growth, low inflation, low interest rates, cheap energy – it’s almost ideal. Several noted stock "gurus" even refer to it as a “Goldilocks economy” where things could hardly be much better. We remain positive about 2018.

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The High Yield Corner
By Michael Foster

We need to spend this week discussing one our favorites - Pimco.

For nearly two years, The Bull Market Report has recommended PIMCO Dynamic Income Fund (PDI: $30, down -3%) for two reasons. The first and most important is the income. The Dynamic Fund has a sustainable 8.9% dividend yield, and it has earned that dividend solidly for as long as the fund has been around. Such a high-income stream is hard to find anywhere - but finding one that is as sustainable and high as this is near impossible. So there has always been good reason to buy and hold the fund.

The second reason to hold this fund is the underlying trends that are good for the main asset class in this fund: mortgage-backed securities. Without getting into a slew of data, the U.S. economy is improving and Americans are paying their mortgages on time more frequently than they did a decade ago. That has translated into a solid run-up for MBSs, many of which were bid down to absurdly cheap levels shortly after the housing crisis in 2007-2009. That, by the way, is what caused Pimco to start the Dynamic fund in the first place; they saw a ton of attractive assets in the mortgage market that were discounted to as little as pennies on the dollar, and they knew those mortgages were a lot safer than the market expected. So they launched the fund to capitalize on that unusual inefficiency in the market, and the Dynamic fund has benefitted healthily since then. It’s up 18% per year on average since its IPO nearly 6 years ago.

That massive run-up is the result of two things: strong income from the portfolio and capital gains from the value of the bonds in the portfolio. In years past, one or the other caused extra upside. In 2017, the upside was from capital gains: the value of the bonds went up. Income, on the other hand, did not exceed expectations. The reasons for that are complicated, but it largely is the result of the MBS market getting crowded. Back in 2011-2013, many people were so terrified of the MBS market that they wouldn’t touch it with a 10-foot pole. Yet it was the absolute bottom of the market. Pimco realized this, and bought when the assets were cheap. They were cheap because the market was expecting net investment income (NII) to be a lot lower on those bonds, but in reality, the income turned out to be higher because defaults were going down. Pimco benefitted handsomely in excess NII.

Closed End Funds tend to return excess NII to investors in the form of a year-end dividend. That’s why at the end of 2016 there was a special $1.45 dividend payout. The fund paid an extra $1.00 in 2015. In 2013? An eye-watering $5.00 in extra income! The special payout in 2013 was so high because the market just wasn’t expecting MBSs to be as safe as they were, so the yield on those bond prices was extremely high. Over time, MBSs in the fund’s portfolio have matured, and Pimco has been buying MBSs at a higher price and lower yield. So NII has declined - but there is still less demand in the MBS market than an equilibrium would assume, so there are still NAV gains in the Pimco fund.

It’s a little complicated, but the moral of the story is this: 2017 saw the Dynamic Fund's NAV total return at 21% and an 18% total price return. PDI’s fundamentals are still outperforming the stock, which is very good. It also means PDI’s NAV is going up. NAV started 2017 at $25.90 and it’s now at $28.70 (11%). The Dynamic Fund is both an appreciating asset and a sustainable high yield asset - both things that The Bull Market Report looks for in its high yield portfolio.

There is just one problem: The lower NII means there isn’t extra income to pass out to investors in the form of a special dividend. We had been saying earlier this year that we did not expect PDI to pay out a special dividend, and it looks like we’re right. Last week on Friday, the company announced that one of its other funds would issue a small special dividend, and the Dynamic Fund would issue no extra dividend at all. This means its yield is going to stay at 8.9% instead of the huge double-digit yields we’ve seen in the past. But the normal dividend is going to remain, and NAV gains could continue throughout 2018 and beyond.

Is it time to sell? No. Although the fund’s special dividends may have come to an end, and with it the near 18% annualized returns, this fund is still good for 10% or more annualized for at least a few years. There will come a day when the MBS market is overbought and it’s time to sell this fund. That day has not come yet. The lack of a special dividend might be a slight disappointment now, but the long-term gains this fund has provided are not going to stop. Enjoy the 8.9% yield and sleep well at night knowing it’s not going to get cut anytime soon.

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

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