• Volume I, Issue 10

LGR Financial Newsletter

Volume I, Issue 10 (Released On April 24, 2014)

Hello all!  I hope everyone had plenty of income to report by tax recently.  As always, let’s try and capture as much capital gain as possible!

After failing to write a newsletter for last week, I began writing a newsletter with information from both weeks, but I realized that there was no way I could do that effectively without making it extremely long. Therefore, I decided to break it up into two separate Issues based on what information is covered. This Issue relates to the period 4/7/14 – 4/11/14, so it is technically old news. Regardless, I hope you all read this Issue and find some useful information in it. You all should have received the 11th Issue of my newsletter, which relates to the period 4/14/14 – 4/21/14, shortly after you received this one. I hope you read and enjoy both of them!

As a reminder, going forward I will be posting all new Issues of my newsletter here on my blog. Also, I have exams coming up so I will be taking a THREE WEEK BREAK, but I may try and send out a few quick emails over the next two-three weeks if anything major takes place.  I’ll have plenty to talk about in three weeks, I’m sure.

For this Issue, I chose to focus solely on keeping you all up-to-date on important news currently going on in financial markets. Earnings season is underway, and how well companies do this season will likely tell us a lot about what direction the market is headed in (for the short-term at least!). This Issue contains a Summary of the Market’s Performance (4/7/14 – 4/11/14), a Portfolio Update, a Market Update, and a short Looking Forward Write-Up.

At one point, at the end of this Issue, I included data from beyond 4/11/14, because I thought it was nice additional information. I highlighted this information in Red to make sure you recognize what information is out of place.

In the future, I plan to do a major write-up on confirmation signals; to discuss what early signs to look for to tell whether or not your predictions are most likely correct.

As always, I appreciate all feedback and recommendations for topics to cover in my write-ups!

Summary of Market’s Performance:

(APRIL 07 - APRIL 11)

All three major indexes dropped.  The Dow Jones Industrial Average (DJIA) slid 2.35% to 16,026.75; the S&P 500 was off 2.65% to 1815.69, and the NASDAQ Composite dropped 3.10% to 3999.73.  All three saw weekly highs on Wednesday’s close, so the drop was most significant on Thursday and Friday.

The market’s plunge hurt the initial public offering (IPO) market most of all.  The week before last was expected to be the IPO market’s busiest week since December 2006, with 16 companies expected to launch; combined, they were looking to raise a total of roughly $5 billion dollars.   In the end, only 10 of the 16 actually managed to be priced.  While the total made it the second most active week of the year, the drop from 16 to 10 made the actual result very unimpressive.  IPOs have not done well recently and that week was no exception.  A strong stock market means a strong demand for IPOs; the converse is also true.

Portfolio Update:

(APRIL 07 - APRIL 11)

The week before last was a rough one for my simulated stock portfolio, but my portfolio vastly outperformed its benchmark (the S&P 500) so it was nowhere near as rough as it could have been. My portfolio declined 1.59%, besting the S&P 500’s decline of 2.65%. I am happy with this performance; I have been thinking that the stock market has been overpriced for quite some time, and I have adjusted my portfolio’s allocation to different sectors accordingly. This contributed to results, but it was not the only factor…

A bet on Questcor Pharmaceuticals, Inc. (NASDAQ CM: QCOR), really helped.  Questcor received a buyout offer this week and the stock’s share price surged accordingly. You can find details for the deal, which is expected to close in Q3 of 2014, by following this link: http://finance.yahoo.com/news/mallinckrodt-buy-questcor-pharma-5-121514993.html

The deal is a little complicated, because an investigation has been launched into whether QCOR’s management team failed to fulfill their fiduciary duty to shareholders by accepting it too readily and not sufficiently marketing the company by looking for competing bids. Also, the deal called for a 30%+ premium to the previous share price, and QCOR’s share price has only gone up 18.05% so far.

Obviously, QCOR was my top performer with an increase of 18.05% for the week. At the end of the week, 7.59% of my portfolio was in a bond ETF, TLT, which tracks the price of 20+ Year U.S. Treasury Bonds, and that increased 2.09% this week. Additionally, 3.42% of my portfolio was in an ETF, GLD, which tracks the price of Gold, and that increased 1.08% this week.

 Also on my list of top performers, for the third week in a row, was Companhia Vale do Rio Doce (NYSE: VALE) and that increased 1.93%, marking a 12.69% increase in three weeks.  Not bad.

Market Update For (major events, news stories, economic data reports):

(APRIL 07 - APRIL 11)

News from the Federal Reserve

The Federal Reserve Open Market Committee (FOMC) released the minutes from its meeting the Wednesday before last. The minutes were interesting, to say the least, and they went a long way to easing investors’ fears regarding the impending interest rate hike. Before the minutes came out many investors were worried that the interest rate hike, currently on schedule to happen at around mid-2015, would signal a change in the Federal Reserve’s “easy money” policies. However, the minutes disclosed the fact that some Fed officials were concerned that  recent statements made by policy makers (Janet Yellen) could be “misconstrued” as indicating that the FOMC will have a “less accommodative” policy stance moving forward. This coincides with the fact that current forecasts are that when interest rates are hiked they will remain below long-term historical interest rate numbers, and investors will continue to have access to “easy money” in the long-term.

Economic News

The Department of Labor announced its March Job Openings and Labor Turnover Survey (JOLTS).  JOLTSis conducted by the
Bureau of Labor Statistics, and the data serves to guide government economic policy.  The JOLTS report indicated Job Openings of 4.17 million vs. 3.99 million expected, which was good news. This data is released 40 days after the month ends but it is important because job openings are a leading indicator of overall employment.  In addition, new unemployment claims stood at 300k vs. 314k expected – likewise good news (Forexfactory.com, Link 1).

Other recently released data likewise was positive for the economy.  The Purchaser Price Index (PPI) for March also was released (a month over month indicator);  the PPI showed an 0.5% rise vs. 0.1% expected – which is positive, particularly after we saw a reading of -0.1% in February. The PPI rose 0.6% excluding the volatile categories of food and energy, which is good — but policymakers only look at numbers that exclude the more volatile categories (these numbers, when reported, have the word “core” before them). The preliminary Consumer Sentiment report was 82.6 positive vs. 81.2 expected, which is another good sign and indicates that the weather may have caused poor economic figures in the Winter to be misleading. Financial confidence is a leading indicator of consumer spending, which accounts for a majority of overall economic activity (Forexfactory.com), and this

Every party needs a naysayer, so the International Monetary Fund (IMF) became one.  The IMF stated its belief that the U.S. continues to struggle with financial markets oversight. The IMF, in a report, said U.S. regulators responded “only partially and with considerable delay” to pressure from the Financial Stability Oversight Council—a panel of top regulators created to prevent a repeat of the financial crisis—to rein in risks posed by the $2.6 trillion money-market mutual-fund industry” (WSJ, Link 2). The IMF holds significant sway over financial markets, and reports from the IMF cannot be taken lightly. As a result, I would not be surprised to see tighter regulations on banks in the near future.

News for certain farm products looks good, in contrast to other commodities.  The USDA projected this week that the cost of fresh fruit “will rise 2.5% to 3.5% nationwide this year” (WSJ, Link 3).  Many of the nation’s biggest farming states were hit worst by the cold this winter, and that caused severe shortages in supply. In short, the pain experienced by U.S. farmers will soon hit consumers, as consumers are forced to pay a higher price for goods from the produce isle. This entire phenomenon is extremely common and any economist can tell you that consumers are often the ones who are forced to bear the burden of any increase in the price of a “normal” good (or any taxes the government forces upon the companies that produce normal goods).

Finally, the Wall Street Journal reported the week before last on an interesting information leak that may have benefited certain investors.  It appears the Centers for Medicare and Medicaid Services (CMS) leaked information relevant to health-insurance companies to Wall Street before the public was even aware that the information existed.  On December 3, a CMS official held a conference call for industry officials, and provided data suggesting that federal funding for private Medicare plans would likely fall more than expected.  Somehow this information made its way to Wall Street and prompted a selloff in shares of insurance companies. The WSJ investigated the impact the information leak had on shares of insurance companies, and said that “In the subsequent 10 trading days [to the information being leaked], shares of several major health insurance firms lost between 3% and 9% of their value. Over that same period, the S&P 500 was down 0.5%” (WSJ, Link 4).  The information wasn’t widely released to the public until January 9, when one health insurance firm, Humana Inc., mentioned it in a public disclosure. The government never broadly released the data (WSJ, Link 4).  This isn’t the first time that the government has allowed sensitive information to reach Wall Street before the public, with a similar situation happening as recently as last year. Is it insider trading when the information comes from the government? How can agencies, such as the SEC, prevent this type of thing from occurring again?

A good picture that compares the stock prices of UnitedHealth Group and Humana to the timeline of these events follows:


 International News

The Bank of England kept its key interest rate at a record low as policy makers “try to gauge the amount of spare capacity in the economy” (Bloomberg, Link 5). The benchmark rate was held at 0.5%, where it has been since March 2009. The Monetary Policy Committee (MPC) also announced that it will keep its asset-purchase program at 375 billion pounds ($629 billion).  The United Kingdom’s Manufacturing Production indicator (month over month) came in at 1.0% vs. 0.3% expected, demonstrating a positive change in the total inflation-adjusted value of output produced by manufacturers. Keeping good news going in the Commonwealth, Australia saw its unemployment rate come in at 5.8% vs. 6.1% expected.

The President of the European Central Bank (ECB), Mario Draghi stated that he is considering “unconventional” easing methods. His reasoning for considering unconventional easing methods is twofold; to help GDP growth in the Eurozone accelerate in the future, and to try and fix the low inflation level in the euro zone and appease the IMF (who has recently been strongly warning the ECB that the Eurozone is headed for a period of deflation) (Marketwatch.com, Link 6).  The ECB has been struggling recently to boost aggregate demand in the Eurozone because the ECB has already kept benchmark interest rates at all-time lows for many years, following the global financial crisis of that ended (“officially”) in 2009.

Greece, one of the nations in the Eurozone that struggled the most in past years, has seen significant economic improvements and may be on its way to a much-anticipated recovery. The country recently completed its first longer-term bond sale since the international bailout in 2010.  Its sale of $4 billion worth of bonds was successfully completed on Thursday. More information can be sound by looking at Link 7.

In Japan, Tokyo’s Nikkei Average had its worst week since March 2011. “Investors questioned the nation’s economic recovery amid strong indications that the Bank of Japan won’t take additional action to fuel growth in the near term” (WSJ, Link 8). The Nikkei declined 7.33% over the course of the week, which was a major hit to an index that has far outperformed its U.S. counterparts over the last year and a half.

China’s trade balance saw a surplus of $7.71B versus expectations of a 0.9B deficit. While that might look like a good thing on paper, the truth of the matter is that China’s exports and imports unexpectedly fell in March by large amounts. Bloomberg broke down China’s import and export data and declared that “Overseas shipments declined 6.6 percent from a year earlier, with imports falling 11.3 percent, in part due to falling commodity prices” (Bloomberg, Link 9). Premier Li Keqiang said China will likely roll out policies to support growth, responding to an economy that is headed for its slowest growth since the global financial crisis of 2008.

Key Stocks in the News

Beginning of Earnings Season:  Earnings season began when Alcoa, Inc. released its earnings after the market’s close on Tuesday (April 8th).  Alcoa, Inc. (NYSE: AA) posted first-quarter earnings of 9 cents per share vs. 5 cents per share (expected) on revenue of $5.45 billion vs. $5.55 billion (expected. After beating its earnings estimates, Alcoa rose 3.75% on Wednesday (the day after its earnings release) and came only $0.02 short of a new 52 week high. Alcoa is no longer part of the DJIA, but it is still considered a bellwether company and its earnings report is still seen as very important by financial analysts on Wall Street. Alcoa’s stock price has gone up 52% since the company left the DJIA last year (CNBC, Link 10), so it is clear that investors do not believe that the company is any less important than it was when it was part of the DJIA.

 Wells Fargo & Co. (NYSE: WFC) posted the bank’s 15th straight quarter of EPS growth (year over year).  The company reported Earnings Per Share (EPS) of $1.05 vs. $0.97 (expected) on revenue of $20.63 billion vs. $20.6 billion (expected).  It reported earnings on Friday (April 11th) and was up 0.78% vs. the S&P 500’s return of -0.95% for the day.

J.P. Morgan Chase & Co. (NYSE: JPM) saw its earnings fall 19% as “the bank grappled with weak fixed-income trading results, while mortgage revenue also suffered” (WSJ, Link 11).  It was down 3.66% on Friday (April 11th) after releasing earnings pre-market.

Finally, Bed Bath & Beyond, Inc. (Nasdaq GS: BBBY) reported earnings after-hours on Wednesday for Q4 fiscal 2013. “The company’s net income declined by 11% during the quarter and its revenues fell by 5.8% to $3.2 billion, missing estimates by almost $20 million” (Forbes, Link 12). There had been weak guidance for BBBY’s first quarter 2014; it estimated a range of $0.92-$0.96, while analysts were expecting the figure to be around $1.02 (Forbes, Link #12).  The company has been under fire from analysts for quite some time now, and it “has seen 11 negative revisions in the past few weeks and its current year earnings consensus has moved lower over the last 30 days” (Zack’s Equity Research, Link 13).

I believe BBBY is seeing Amazon encroach on its market, while it still feels the impact of weak consumer confidence, slowing housing recovery and extreme weather conditions (many of these problems were cited by the company’s management team in their quarterly report). This quarterly earnings reported, the second consecutive lackluster quarterly earnings report that the company has seen, caused BBBY’s share price drop 6.17% on Thursday (the day after its earnings release).  Forbes Magazine remains bullish on BBBY in the long run, claiming the recent “lack of momentum” in its share price is unlikely to have a long term impact on the company. They continued by saying that “BBBY still remains the strongest home goods retailer with its expansive product variety; despite being a specialty retailer, BBBY’s products are not too expensive compared to Amazon, which positions it very well to fend off competition from the online giant. Additionally, the company has taken several steps towards the development of its online business and omni-channel platform that can help its revenue growth going forward. Forbes estimates BBBY’s stock will increase to $78.80, implying a premium of about [23.7%] to the [current] market price” (Forbes, Link 12). However, Forbes continued by saying that they will re-evaluate their price estimates for BBBY after the company’s recent earnings report, although that is not necessarily indicative of a downward price estimate for the company.

I am also bullish on BBBY long-term, and I hold shares of the company in my simulated portfolio (the position currently makes up 2.50% of my portfolio). I believe that the fact that the company’s share price has depreciated significantly, in recent months, provides a great long-term entry spot. The company appears to be making its way into “deep value” investing territory, and any price close to $60 is a great spot to buy at. If BBBY’s share price continues to fall I will add more shares to my position at the $60 level.

If you have any questions about this Issue of my Financial Newsletter please fill out the form below. I also appreciate receiving any comments you might have about what you just read, and I encourage you to send me ideas for topics that you would like to see me write about in the future. Thank you for reading!

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