Author Archives: Scalper1

A Slowdown In Stock Buybacks? Don’t Expect Institutional Buyers To Pick Up The Slack

According to FactSet, S&P 500 earnings will drop roughly 8.3% in the first quarter. That’ll mark the fourth consecutive quarter of declines in corporate profits-per-share. Why might that matter? There are only two occasions over the previous two decades where earnings contractions lasted longer. In both instances, the U.S. economy experienced a recession; in both instances, the S&P 500 lost HALF of its value. Does the current earnings malaise mean that history will repeat itself? No. On the other hand, there are always reasons for a slump in profits. Those who ignored the tech sector’s warnings in 2000 witnessed their portfolios disintegrate. Similarly, those who pushed aside the financial sector’s admonitions in 2008 experienced life-altering losses. There is another reason why the contraction in corporate profits are a troublesome omen. Historically, declining earnings weigh on corporate confidence with respect to buying back shares. Extended periods of earnings contractions have led companies to sharply reduce their acquisition of shares in the past. The average pace of share reduction was a peak-to-valley slowdown of 62 percent. It follows that with corporations serving as the only significant buyer of stock at this moment – with retail investors, institutional investors , hedge funds, pensions as well as mutual fund managers participating as “net sellers” – we may be staring at the peak in the corporate buyback cycle. The bullish counter-argument to the notion that companies may slash their buyback activity is the new corporate bond buying program by the European Central Bank (ECB). Specifically, the ECB’s willingness to buy non-sovereign debt – their eagerness to purchase company obligations in addition to country obligations – has the effect of tightening corporate credit spreads. In English, please? The cost of corporate borrowing around the world should move even lower. And if it does so, why… how can companies resist the urge to borrow more money to buy back more shares? There may be some validity in the thought process. After all, look at the remarkable spike in the Vanguard Long-Term Corporate Bond ETF (NASDAQ: VCLT ) in the weeks leading up to the anticipated “bold-n-creative stimulus” by the ECB. It is almost as if buyers began anticipating dramatically lower yields (higher prices) for investment grade corporate bonds. (I know that I added to long-term corporates in the week leading up to the ECB’s March decision.) Unfortunately, however, the notion that ultra-low borrowing costs alone can provide everlasting support to a bull market is false. As I pointed out in earlier interest rate commentary , there were significant bear markets – stock bears in 1937-1938 (-49.1%), 1938-1939 (-23.3%), 1939-1942 (-40.4%), or 1946-1947 (-23.2%) – when the 10-year yield was low like it is today. In all four instances, the stock market was a remarkable bargain by comparison, trading at HALF the valuation levels of 2016. In two instances – 1939-1942 (-40.4%) and in 1946-1947 (-23.2%) – rates were low and the U.S. economy was booming. Regardless of whether you wish to examine recent history, where decelerating stock buybacks peaked and sharply reversed course alongside contraction in corporate earnings, or whether you look for clues in the twenty year period of ultra-low borrowing costs (i.e., 1936-1955), where stock valuations were HALF what they are in March of 2016, history does not paint a pretty picture for stocks going forward. What about improvements in the technical picture? Hasn’t my favorite gauge of market breadth – the New York Stock Exchange A/D Line – demonstrated that the stock bull is back? Not really. Not yet, anyway. At the moment, the A/D Line is bumping up against the same resistance as it did in the October-November period. The February-March bounce has more of the markings of a bear market rally than a true blue bull. Moreover, the downward slope of the A/D Line’s long-term trendline is more indicative of future volatility and bearish implications. The same technical analysis uncertainty exists in popular ETFs like the SPDR S&P 500 Trust ETF (NYSEARCA: SPY ). The downward slope of the 200-day moving average is bearish. What’s more, the October-November bounce logged “lower highs.” The same appears quite probable for the current rally. Additionally, there are plenty of technical signs that are rather disadvantageous for risk assets . For instance, one is only going to find 40% of individual stocks above respective 200-day moving averages. Similarly, in the immediate-term, Bespoke Research reports that two-thirds of S&P 500 stocks are overbought. In sum, earnings are awful and fundamental overvaluation remains irksome. Also, corporate buybacks are slowing at a time when corporations are the primary support for low volume price appreciation. Most historical comparisons to similar circumstances are unfavorable. And the technical forecast is “cloudy with a chance of afternoon thunderstorms.” If only the headwinds stopped there. Political uncertainty is also hampering risk-taking in equitites . Does anyone truly believe that Trump and Sanders would be influential in the present primaries if the U.S. economy were “hunky-dory?” Voters do not vote to bring down the establishment unless they are disturbed by threats to their financial well-being. Consider these realities: (1) Since the Great Recession ended, the percentage of Americans who own homes has FALLEN from 67.3% to 63.8%, (2) Since the Great Recession ended, real median household income has FALLEN from $54,925 to $53,657, and (3) Since the Great Recession ended, millions of 25-54 year old Americans are no longer working, as the percentage of people in the 25-54 demographic working has FALLEN from 83.5% to 81%. In what prior economic recovery have wages decreased, the rate of home ownership decreased, and the percentage of working-aged individuals in the labor force decreased? None. In other words, economic weakness breeds political unrest; both are significant headwinds to stock price gains. Perhaps the most disconcerting misrepresentation in the media is the headline unemployment rate of 4.9%. In reality, job creation in low-wage industries has not been able to keep up with the growth of the working-aged population. The Federal Reserve’s own Labor Market Conditions Index (LMCI) reflects the reality that the misleading employment data fails to capture the weakness in actual employment trends. It should be noted, in fact, that the LMCI is currently contracting. It follows that if the Fed pays attention to its own LMCI, as opposed to the Bureau of Labor Statistics ( BLS ) headline U-3 data point of 4.9%, they may back off the rate hike train. My guess? They’re going to maintain their guidance of gradual stimulus removal. So they may not hike overnight lending rates in March. Yet they may do it in May or June. And that would likely come at a time when corporate profits will be set to decline for a fifth consecutive quarter. Put on your safety goggles! Disclosure: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc, and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert web site. ETF Expert content is created independently of any advertising relationships.

Notebook Blahs, Broadwell Timing Could Slug Intel Q1: Analyst

A Needham analyst trimmed his Intel ( INTC ) Q1 sales views by $500 million Tuesday amid declining PC sales and delayed data center sales, and ahead of the March 31 Broadwell CPU launch. He retained his estimates for the balance of the year, however. In afternoon trading on the stock market today , Intel stock was up a fraction, near 31.50. But shares are down 9% this year on Wall Street due to concerns that PC sales will hit a slump in Q1. Needham’s N. Quinn Bolton is the most recent in a series of analysts to cut expectations. For Q1, Bolton sees $13.6 billion in sales and 46 cents earnings per share ex items, vs. earlier views for $14.1 billion and 50 cents. The largest chunk — $400 million — came out of Intel’s client computing group. Cumulative notebook shipments from Taiwan’s five leading notebook makers fell 32.7% sequentially and 15.7% year over year in January and February, Bolton wrote in a research report. Notebook shipments haven’t been flat in March since 2011. If they are in 2016, he models a 23.3% sequential and 9.7% year-over-year decline in Q1 shipments. Bolton expects Q1 notebook shipments to decline 14.2% quarter over quarter and 3.5% vs. the year-earlier quarter. For Intel, that means $7.44 billion in sales vs. earlier expectations for $7.84 billion. The new model would be relatively flat year over year. He also chopped $100 million off his data center group expectations, noting a potential pause in enterprise data center shopping ahead of the launch of new Intel server chip Broadwell this month. Last year, Intel pulled in $3.7 billion in data center sales. Intel Might Soon Update Its Guidance After Q1, Bolton sees a return to spending. “The weak notebook shipments likely are a result of inventory clearance in the PC channel, and we expect data center group revenue to rebound in Q2 following the Broadwell launch,” he wrote. “We are not changing our Q2, Q3 and Q4 estimates at this time.” Intel could update guidance this week before entering a quarterly quiet period Friday. Per company policy, Intel updates guidance if business appears to be tracking outside the range of original expectations. In January, Intel guided to $14.1 billion, plus or minus $500 million, in current-quarter sales. “Should the company enter the quiet period with no revision to guidance, our new estimates will likely prove conservative,” Bolton wrote. Last month, Nomura analyst Romit Shah lowered his Q1 sales forecast for Intel , modeling a 20% sequential decline vs. earlier views for a 7% decline. In January, a Citigroup analyst modeled a 20%-25% quarter-over-quarter fall in Q1 notebook shipments. But, like Bolton, Shah retained his buy rating on Intel stock, noting Q1 is typically a “back-end loaded quarter.”

Adobe Systems Q1 Earnings Expectations Are Cloud High

Digital media software firm Adobe Systems ( ADBE ) is expected to keep the good times rolling when it reports fiscal first-quarter earnings after the market close Thursday. Analysts polled by Thomson Reuters predict that Adobe will post earnings per share of 61 cents excluding items on sales of $1.34 billion. It would translate to year-over-year growth of 39% in EPS and 21% in sales. For fiscal Q2, analysts are modeling earnings of 65 cents a share minus items, up 35%, on sales of $1.39 billion, up 20%. Like Microsoft ( MSFT ), Adobe has earned the favor of investors through its transition from desktop software to Internet cloud computing services. Adobe has three cloud computing businesses: Creative Cloud, Marketing Cloud and Document Cloud. The biggest is Creative Cloud, which includes well-known products for creative professionals such as Photoshop, Illustrator and InDesign. Marketing Cloud provides online marketing and advertising services. Document Cloud leverages Adobe’s popular online document-sharing product Acrobat and its ubiquitous PDF format. Adobe stock was down a fraction, near 86.50, in afternoon trading on the stock market today . Adobe hit an all-time high of 96.42 on Dec. 17, just days after it reported better-than-expected fiscal Q4 earnings . UBS analyst Brent Thill on Monday reiterated his buy rating on Adobe stock with a 12-month price target of 105. In a research report, Thill said that he expects Adobe’s Q1 report to be a “solid kickoff to the year.” Investors will be focused on Creative Cloud subscribers, Digital Media annual recurring revenue and operating expenditures, Thill said. “We expect few surprises, as we think the creative/marketing spend environment was generally stable and we did not detect any significant promotions,” he said. “Macro remains a potential risk for the year, but for ADBE to get hit, we would have to see a prolonged recession, including sharp cuts to advertising & marketing budgets leading to layoffs in related staff, which we do not see as a high probability at this time.” Adobe will be better shielded from recessions than some other companies, since most of its revenue now is on a subscription basis, he said. Adobe exited fiscal Q4 with 74% recurring revenue. “ADBE remains a top large-cap growth story, with double-digit revenue growth, expanding 30%+ margins and clear leadership in its core markets,” Thill said. Rosenblatt Securities analyst Kirk Adams on Friday maintained his buy rating on Adobe stock, with a price target of 112. “We believe that their core businesses of Creative and Marketing Cloud will show strong growth in both revenues and earnings,” Adams said. “More importantly, we believe their outlook will remain strong.”