LGR Financial Newsletter
Volume I, Issue 5 (Released On February 23, 2014)
Lots of news to discuss this week!
Links to all the articles mentioned in this Issue of my Newsletter can be found at the bottom of this page.
Both the Dow Jones Industrial Average and the S&P 500 ended the week in the red, down 0.32% and 0.13% respectively, while the NASDAQ ended the week with a gain of 0.46%. The S&P 500’s intra-day high this week was just 0.18% shy of its all-time high and the DJIA’s intra-day high this week was 2.23% away from its all-time intra-day high. The NASDAQ actually set a new all-time closing high this week at 4,263.41, with a new all-time intra-day high of 4,284.85.
Hewlett-Packard Co. (NYSE: HPQ), Tesla Motors Inc. (NASDAQ: TSLA), Life Time Fitness Inc. (NYSE: LTM), Wal-Mart Stores, Inc. (NYSE: WMT), Coca Cola Co. (NYSE: KO), DirecTV Group Inc. (NASDAQ: DTV), DISH Network Corp. (NASDAQ: DISH), and Priceline.com Inc. (NASDAQ: PCLN) all released their earnings this week. TSLA, LTM, DTV, DISH, and PCLN all did well with their earnings reports and saw their stock prices jump 8.43%, 5.15%, 2.93%, 1.49%, and 2.54% respectively on the days that their earnings reports were released. (I added LTM to the list more for my own personal interest because I follow the stock and have a large position in the company in my simulated portfolio). Unfortunately, for a variety of reasons, HPQ, WMT, and KO all released earnings that displeased Wall Street and they fell 1.32%, 1.77%, and 3.75% respectively on the days that their earnings reports were released.
Despite the poor reaction (in terms of share price) to Hewlett-Packard’s earnings report, it is important to note that the company actually beat profit and revenue expectations, and “H-P recorded PC revenue of $8.5 billion, up 4% year-over-year and better than the $7.7 billion consensus estimate” (MarketWatch). IDC analyst, Crawford Del Prete, told MarketWatch that “PC’s did very well” and “this speaks to the point that it’s ‘fashionable’ to talk about the death of the PC, but the truth is that there are many tasks that people will continue to do with a PC” (MarketWatch). The CEO of HPQ, Meg Whitman, said in a statement that “HP is in a stronger position today than we’ve been in quite some time.” She adds: “Innovation is igniting our comeback, and at a time when many of our competitors are confronting new challenges, two years of turnaround work is setting us up for an exciting future” (MarketWatch). HPQ’s shares opened 1.42% on Friday, the day after the earnings release, and then proceeded to decline as the day went on.
Also in the news, Groupon Inc. (NASDAQ: GRPN) took investors for a crazy ride when it released its earnings after hours. Initially, the stock posted a double digit percentage jump in after hours trading, due to strong revenue year-over-year, but after closer examination of the company’s earnings report, and the company’s forward guidance for the next year, investors realized that they didn’t like what they saw and the stock plummeted 21.88% the next day (9.04% of the decline happening pre-market and the rest in a major sell-off during the day). Talk about an opportunity for the shorts!
My portfolio increased 1.04% this week with Questcor Pharmaceuticals, Inc. (NASDAQ: QCOR), Air Lease Corp. (NYSE: AL), and Life Time Fitness Inc. (NYSE: LTM) leading the way with weekly gains of 10.44%, 6.25%, and 2.81% respectively. Those increases were driven by a variety of factors, in particular LTM exceeded earnings expectations and QCOR announced a dividend. Air Lease (AL) is my biggest position (8.27% of my portfolio at the end of the week) so it was nice to see it do well this week.
The Congressional Budget Office released a report on Thursday that stated that if the federal minimum wage was raised to $10.10 an hour, as President Obama wants, it “would eliminate about 500,000 jobs by 2016 but increase pay for millions of Americans and lift nearly a million out of poverty” (WSJ). An increase in the minimum wage to $10.10 an hour would be a significant jump from the current minimum wage of only $7.25 an hour, and “The CBO said that a gradual increase to $10.10 an hour by July 2016 would eliminate 500,000 jobs, but lift 900,000 Americans out of poverty from the total of 45 million projected to be living in poverty in 2016” (WSJ).
The makers of the extremely popular smartphone game “Candy Crush,” King Digital Entertainment PLC, have filed for a $500 million Initial Public Offering (IPO). There is a lot I could say about this, but in brief I find it extremely interesting because I believe applications for handheld devices are the future. Investors seem excited about the impending IPO (if it is approved), but they are also wary of King following in the footsteps of Zynga, a company that makes similar types of games whose stock price (at the end of this week) was exactly 50% below its IPO price. King is aware of the hype over its IPO, and it is taking steps to ensure that it doesn’t follow in Zynga’s wake. The company “plans to list its shares on the New York Stock Exchange under the ticker symbol KING” (WSJ).
The Bank of Japan (BOJ) announced that it would continue to expand its monetary base at the current annual rate, “while focusing on expanding credit demand in an economy that is expected to continue its modest rate of recovery. The BoJ will conduct money market operations to increase its monetary base by 60 trillion yen to 70 trillion yen annually. It will purchase Japanese government bonds worth 50 trillion yen annually, and buy exchange-traded funds, or ETFs, at an annual pace of 1 trillion yen. The bank will also buy Japanese real estate investment trusts, or J-REITS, worth 30 billion yen and maintain outstanding corporate debt worth 5.4 trillion yen” (IBTimes.com). That’s good news for those looking for improved growth in Japan to counter slowing growth in China.
Facebook agreed to buy messaging company WhatsApp for $19 billion in “cash and stock, a blockbuster transaction that dwarfs the already sky-high prices that other startups have been able to recently command” (WSJ). The deal, and WhatsApp as a company, are quite amazing. The service has only been around since 2009 and it already has over 450 million monthly users, which make the service more popular than Twitter (240 million users and valued at about $30 billion). The service has seen its membership double in the past nine months, and the CEO of the company now estimates that about one million new users are added daily, and 70% of its total users use the service daily. More facts can be found in the link at the end of this newsletter.
On Friday, the Fed released transcripts from their meetings during the 2008 financial crisis, and this is the first time they have ever been seen. Specifically, they “released transcripts of 14 policy and emergency meetings beginning in January 2008, when then-Federal Reserve Chief Ben Bernanke and other Fed officials candidly expressed fears that the economy was continuing to slide, investment banks remained at risk of failing, and a looming crisis was spreading from financial sector stocks to global markets and economies” (usatoday.com). The transcripts are expected to provide primary source material for Steven Spielberg’s remake of “The Abyss.” (A joke that is only funny in retrospect!)
On Friday, Barnes & Noble (NYSE: BKS) received “a proposal from G Asset Management LLC to acquire 51 percent of the company at $22 a share, valuing the total business at $1.32 billion” (Bloomberg.com). Additionally, “G Asset also proposed buying 51 percent of Barnes & Noble’s Nook e-book division at $5 a share as an alternative deal, according to a statement today from the investment firm. It said it was confident that separating the business would unlock ‘substantial’ shareholder value” (Bloomberg.com). This actually isn’t the first time that G Asset has made a bid for Barnes & Noble; last November G Asset made a $20-a-share offer (Bloomberg.com), and the firm has been “pushing Barnes & Noble to spin off its Nook division since at least 2011” (Bloomberg.com). Barnes & Noble ended the day up 5.42%, on extremely high volume, after being up as high as 14.36% earlier in the day.
A Little “Adverse Weather” Never Hurt Anyone….
But apparently it hurt the economy. As anyone who follows domestic economic data releases can tell you, the phrase “adverse weather conditions” has been thrown around a lot recently. Frankly, I’m tired of hearing it. As another member of the Boston College Investment Club said at our most recent meeting, “it’s like they’ve never heard of winter before.” That statement isn’t too far from correct. This week saw numerous economic data releases fall short of analysts’ expectations, and many of these economic data releases blamed the weather for their shortcomings. For example, on Wednesday, February 19, 2014, “Building Permits” and “Housing Starts” data was released, both of which fell significantly short of expectations (Forexfactory.com). The Commerce Department stated that “U.S. housing starts fell 16% last month to a seasonally adjusted annual rate of 880,000, the lowest level since September… That was down from an upwardly revised December rate of 1.05 million new homes built, marking the largest month-over-month decline since February 2011. Economists surveyed by Dow Jones had expected a 4.9% drop in starts to an annualized rate of 950,000” (WSJ). Additionally, “Building permits, a sign of future construction, fell 5.4% to a seasonally adjusted annual rate of 937,000 last month from December’s upwardly revised rate of 991,000. Economists predicted a 1.1% decline to an annualized rate of 980,000” (WSJ). A key phrase in that first quote should be “seasonally adjusted annual rate”… Wait… what? “Seasonally adjusted”? You mean they actually took the season into account when they came up with their figures? If that is the case, why do the next two lines of the article read: “Winter weather likely dragged down the housing sector in January after strong growth throughout most of 2013. Many economists already have blamed cold and snow in the eastern U.S. for a weaker-than-expected performance by retailers and factories this winter”? (WSJ). That’s awkward… In reality what the article, and the housing data, is saying is that the housing market as a whole seems to be taking a bit of a break, and the break has nothing to do with the weather. “Some of the figures suggest more than just the weather may be at work. The pace of housing starts last month actually rose in the chilly Northeast by 61.9% but it fell 67.7% in the Midwest to the lowest pace on record. Starts also fell 12.5% in the South and 17.4% in the West, which has experienced relatively warm weather” (WSJ). As a result of these reports, several economists lowered “their predictions for first-quarter economic growth. Macroeconomic Advisers cut its forecast by a tenth of a percentage point to an annualized 1.7%. Barclays Capital lowered its forecast by 0.3 percentage point to an annual rate of 1.9%” (WSJ). There definitely is something more than weather going on here…
Additionally, just to help prove my point, I would like to draw attention to the fact that some skeptical reports have been released recently in regard to retail sales data. In my mind, and in the minds of many other people, retail sales is the one area that would be most affected by “adverse weather”. This makes sense, right? When the weather is bad people are less likely to go shopping at their local retailers, and we can expect that they would then turn to shopping online. January retail sales fell 0.4% (m/m) after “a revised 0.1 percent drop in December that was previously reported as an increase, according to Commerce Department figures released [February 12th] in Washington” (Bloomberg). It should come as no surprise to anyone at this point that these declines in Retail Sales were blamed, in reports from the Commerce Department itself, on the weather. For everyone out there who considers themselves to be visual learners, or just appreciates charts like I do, I have attached to this Issue a chart of “January Retail Sales” data presented by the website, Zero Hedge (zerohedge.com).
The chart clearly shows that “Retail Sales” as a whole not only declined 0.4% (m/m), but also that “Online Retail Sales” decreased by an even large 0.6% (m/m) over the same time period. That fact alone, along with the fact that “adverse weather conditions” means low temperatures and snow not power outages (meaning the internet – online retailing – was still available), means that people need to start looking past the phrase “adverse weather conditions” and start looking at the “cold hard facts” (pun intended). These numbers came on the heels of poor “Retail Sales” numbers during the holiday season, a season that everyone hoped would demonstrate the recovering economy by showing an increase in consumer spending. The second chart attached to this Issue, from a different Zero Hedge article, gives a more complete picture of retail sales throughout the entire country.
The first Zero Hedge article is amusingly titled “It Was So Cold In January, Even The Internet Froze” (zerohedge.com). It would appear that I’m not the only one trying to add some humor to otherwise dreary data….
Hockey And The Stock Market: A Correlation?
Finally, something to remember for four years from now. Some people seem to see a relationship between ice hockey and the market. One of the big games from the Sochi Olympics was the men’s ice hockey game between Canada and the U.S., with millions of people from both countries watching the game live on their TVs. Some of those people just happened to be investors. On Friday, investors posting on Marketwatch.com’s live blog gave constant updates on the score of the game, while it was going on, and at 1:58 PM a well-known contributor to the blog posted the comment: “Trading volume in the Canadian stock market dropped on Friday and it seems the main culprit is the Olympic semifinal game against the U.S. Canada is ahead 1-0 in the third quarter with only a few minutes left” (Marketwatch.com – Live Blog). It seems many traders were anxiously waiting for the game to end because right before the game ended volume on all major stock exchanges were at their lowest point for the day, and then after the game ended (with the unfortunate defeat of the U.S. men’s ice hockey team) volume picked up and major U.S. stock exchanges headed lower.
At 2:19 PM, after the game was over, this post submitted in the blog: “Canada wins, Dow drops. Repeat after me: Correlation is not causation. At any rate, the Dow is down 10 points. Investors seem to be sitting on their hands — and weekly gains — ahead of the weekend” (Marketwatch.com – Live Blog). From 2:00 PM to 2:40 PM, around the time the first post on the blog was added – while the game was still going – to a little bit after the second post was added, the S&P 500 (as measured by the ETF: SPY) dropped 0.25% on higher volume. The Toronto Stock Exchange (TSX) moved slightly lower of the day, declining only 0.03%, but it was higher during the day, most likely after the hockey game ended, and it is true that volume for the day was lower than average. Friday was actually the first time that the TSX posted a decline, after being up for 12 straight trading days, and the stock exchange set a new intraday high on Friday. Unfortunately, I do not have access to live intra-day market data for the TSX, so I am unable to tell if the exchange reached a high directly after the hockey game ended, or if volume picked up, but I would wager that it is fairly likely that both of those things occurred as a result of the hockey game. The TSX has far outperformed American stock exchanges so far this year.
Links To All Articles Mentioned:
Minimum wage article: http://online.wsj.com/news/articles/SB10001424052702304675504579391201355442502
KING article: http://online.wsj.com/news/articles/SB10001424052702304675504579390580161044024
Facebook and WhatsApp article: http://online.wsj.com/news/articles/SB10001424052702304914204579393452029288302
Japan monetary easing article: http://www.ibtimes.com/bank-japan-continues-easy-monetary-policy-focus-stimulating-credit-demand-expects-moderate-recovery
Fed’s 2008 transcripts article: http://www.usatoday.com/story/money/2014/02/21/federal-reserve-releases-inside-details-of-unfolding-2008-financial-crisis/5675101/
Barnes & Noble article: http://www.bloomberg.com/news/2014-02-21/barnes-noble-gets-takeover-proposal-from-g-asset-management.html
Marketwatch.com Live Blog: http://blogs.marketwatch.com/thetell/2014/02/21/stock-market-live-blog-indexes-flat-groupon-slumps-gold-miners-in-focus/
Housing Market Data Article: http://online.wsj.com/news/articles/SB10001424052702304914204579392721167592170
Zero Hedge Retail Sales Article #1: http://www.zerohedge.com/news/2014-02-14/it-was-so-cold-january-even-internet-froze
Zero Hedge Retail Sales Article #2: http://www.zerohedge.com/news/2014-01-08/holiday-shopper-traffic-tumbles-146-online-sales-miss-expectations
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!