Federal Reserve cuts benchmark interest rate by 25 basis points

Fed Chair Powell says more rate cuts could be needed if economy weakens

The Federal Reserve voted to cut interest rates by a quarter-percentage point for the second time in as many months to cushion the economy against a global slowdown amplified by the U.S.-China trade war. While they left the door open to additional cuts, officials were split over the decision and the outlook for further reductions.

Voting for the today’s 25 basis point cut today were Federal Reserve Chairman Jerome Powell, John Williams, Michelle #Bowman, Lael #Brainard, Richard #Clarida, Charles #Evans, and Randal #Quarles. Voting against the action were James #Bullard, who preferred at the meeting to lower the target range for the federal funds rate to 1.5% to 1.75%, and Esther George and Eric Rosengren, who preferred to maintain the target range at 2% to 2.25%.

FOMC Chair Powell votes for rate cut., Stockwinners

The Federal Reserve said in today’s statement, “Information received since the Federal Open Market Committee met in July indicates that the labor market remains strong and that economic activity has been rising at a moderate rate. Job gains have been solid, on average, in recent months, and the unemployment rate has remained low. Although household spending has been rising at a strong pace, business fixed investment and exports have weakened. On a 12-month basis, overall inflation and inflation for items other than food and energy are running below 2 percent. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed.”

Trade Negotiations

Fed Chair Powell said the Fed has to try to look through near-term volatility due to “complex” trade negotiations to react to the underlying economic situation. Powell said the central bank needs to be careful to not overreact but also to not underreact.

The Fed continues to see a strong labor market and reiterated that economic activity has been rising at a moderate rate. Job gains have been solid, on average, in recent months, and the unemployment rate has remained low.

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There was still a split between solid household spending, but weakening in business fixed investment and exports. Inflation is still running below 2%, while market-based measures of remain low. The Committee continued to appeal to implications of global developments for the economic outlook and low inflation as rationale for the easing.

More from Powell: this is a time of difficult judgments and disparate perspectives. The bulk of the FOMC is taking it meeting-by-meeting. He continues to believe it’s better to be proactive when adjusting policy, and when trouble is seen approaching on the horizon, you should steer away from it if possible. The Fed has repeatedly shifted policy to support the economy, showing the Fed’s willingness to to move based on an evolving risk picture. There’s real uncertainty around the effects of the trade policy. On the funding issues seen this week, Powell said analysts took appropriate actions to address the pressures. If there are additional pressures, analysts have the tools to address the funding pressures and analysts will not hesitate to use them. The Fed will be returning to the question of when to build the balance sheet. The level remains uncertain, however.

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Feds Cut Rates on All Instruments!

Federal Reserve cuts federal funds target rate by 25 basis points

The Federal Reserve said in today’s statement, “Information received since the Federal Open Market Committee met in June indicates that the labor market remains strong and that economic activity has been rising at a moderate rate. Job gains have been solid, on average, in recent months, and the unemployment rate has remained low.

Powell, FOMC Chair, Stockwinners
Fed Chief Powell. Stockwinners.com

Although growth of household spending has picked up from earlier in the year, growth of business fixed investment has been soft.

On a 12-month basis, overall inflation and inflation for items other than food and energy are running below 2 percent. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed. Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability.

In light of the implications of global developments for the economic outlook as well as muted inflation pressures, the Committee decided to lower the target range for the federal funds rate to 2 to 2-1/4 percent. This action supports the Committee’s view that sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective are the most likely outcomes, but uncertainties about this outlook remain.

As the Committee contemplates the future path of the target range for the federal funds rate, it will continue to monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion, with a strong labor market and inflation near its symmetric 2 percent objective.”

Long Term Rates

The Federal Reserve also said in today’s statement, “In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its maximum employment objective and its symmetric 2 percent inflation objective.

This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The Committee will conclude the reduction of its aggregate securities holdings in the System Open Market Account in August, two months earlier than previously indicated.”

Bernanke came up with “Quantitative Easing” in 2008, Stockwinners

If you have no idea what the above paragraph means, this may help. Back in 2008, Ben Bernanke, then the Fed Chair, came up with a clever idea! Since the rates at the time where near zero. He needed a way to lower the rates, he started buying long term government bonds. The added demand for bonds caused bond prices to rise thus pushing the rates lower. In the past few quarters, the Feds have been selling these bonds, pushing prices lower, thus higher long term rates. Today’s announcement basically says Feds are ending the bond sales two months earlier, long term rates (mortgage prices) will now go lower.

Powell Comments

Federal Reserve Chair Jerome Powell said the easing was to ensure against downside risks, as he begins his press conference.

He acknowledged the shift in the policy stance since December’s pivot. Fed has seen both positive and negative developments since the June meeting, including a stronger job market, but weaker manufacturing and disappointing foreign growth, while contacts continue to cite ongoing trade uncertainties are giving companies pause.

The Committee has gradually lowered the assessments of growth and that led to the easing today. On whether a 25 bp cut will prop up inflation, he noted one has to look at the Committee’s actions over the year as it’s moved to a more accommodative stance.

The Committee is thinking of today’s action as a mid-cycle adjustment to policy, designed to provide support for the economy, ensure against downside risks, and support inflation. Chair Powell continued to appeal to downside risks and below target inflation as the main threats to the favorable outlook.

He added, the Fed will monitor the evolution of trade uncertainty, which do seem to be having significant effect on the economy. He thinks trade is a new factor that the FOMC will have to assess “in a new way.”

The chair again said it’s not appropriate to just look at the quarter point easing, but rather the evolution of the Fed’s stance from tightening to easing, with the economy picking up since the end of 2018, which suggests monetary policy is working (though he declined to take full credit for the economy’s gains).

10-year yields fall, Stockwinners
Ten year yields approach 2.00 percent, Stockwinners

Market Action

The Fed repeated it will “monitor” incoming information and will “act as appropriate to sustain the expansion,” not really suggesting the path ahead. The long end of the Treasury market is leading the way with the benchmark 10-year 4.4 bps lower to test 2.00, versus 2.023% just ahead of the announcement. The 2-year is down 1.4 bps to 1.83% versus 1.81% earlier. Hence, the curve has flattened to 17 bps from around 20 bps previously.

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Retail Sales Plunged in December

U.S. retail sales dropped 1.2% in December with ex-autos plunging 1.8%.

Retail sales plunge in December, Stockwinners
Retail sales plunge in December, Stockwinners

November’s 0.2% headline gain was revised down to 0.1%, while the 0.2% ex-auto figure was unrevised after strong gains in October of 1.0% (revised from 1.1%) and 0.8% (revised from 1.0%), respectively.

Sales excluding autos, gas, and building materials tumbled 1.6% versus the prior 0.7% jump (revised from 0.6%). Motor vehicle sales climbed 1.0% after a 0.7% prior gain (revised from 0.2%).

Gas station sales declined 5.1% from -4.4% (revised from -2.3%). Food, beverage prices were down 0.4% compared to 0.1% previously (revised from 0.4%).

Building materials edged up 0.3% from -1.5% (revised from -0.3%). Furniture sales dropped 1.3% from 0.5% (revised from 1.2%).

Clothing sales fell 0.7% from 0.4% (revised from -0.2%). Nonstore retailers were down 3.9% from 2.8% (revised from 2.3%).

Miscellaneous sales crashed down 4.1% from 4.0% (revised from 0.4%). This is a very disappointing result and should knock yields and equities lower.

Some analysts blame the drop on the government shutdown while others are seeing a worrying consumers above the situation in Washington as the main reason.

Retailer Stocks to Watch: FIVE, OLLI, ULTA, and BOOT.

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Canary in the mine, Homebuilders

Homebuilders continue tumble as Credit Suisse downgrades several in space

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Homebuilder shares tumble; Stockwinners

Many believe that housing market is the engine of the economy. If that is the case, we should expect a slow down in the economy. Housing prices have always been one of the first indicators of a slowdown or a coming out of a recession for the economy. We should brace ourselves for lower home prices!

Shares of homebuilders continued their decline after an analyst at Credit Suisse downgraded several companies in the space, saying that she expects more tempered demand and rising affordability concerns to weigh on homebuilding sentiment and broader group valuation, offsetting any near-term earnings beats.

A different analyst at the firm downgraded home improvement retailers Home Depot (HD) and Lowe’s (LOW) this morning, due to his concern that their recent results and stock prices have disconnected from housing.

HOMEBUILDERS DOWNGRADED

Credit Suisse analyst Susan Maklari told investors in a research note this morning that although she believes housing and macro fundamentals remain “intact,” including high consumer confidence and sustained low unemployment, unit gains are likely to moderate.

She sees any near-term earnings beats to be offset by even more tempered demand and rising affordability concerns. She sees average order growth for 2019 of 8%, compared to 11% in 2018 and 12% in 2017, and sees “relative” outperformance from builders who are able to capture above-trend gains due to product mix, like D.R. Horton (DHI), and geographic positioning, like PulteGroup (PHM). Maklari downgraded Lennar (LEN) and Meritage Homes (MTH) to Neutral from Outperform and lowered her respective price targets for the shares to $45 from $55 and to $36 from $50.

The analyst sees more limited upside to Lennar looking ahead as its strategic initiatives, as well as geographic exposure, are reflected in its current valuation.

While Meritage has benefited from efforts to drive improvements in operations in its East region as well as the rollout of its entry level targeted homes, Maklari believes much of the initial gains have been captured and she expects limited upside to the current valuation as comparisons become more difficult.

The analyst also downgraded KB Home (KBH) to Underperform from Neutral and lowered her price target to $18 from $27, saying that over the last several months her channel checks and Realtor Survey have pointed to slowing demand in higher cost MSAs, including California, which accounted for about 50% of the company’s 2017 revenues.

HOME DEPOT, LOWE’S ALSO DOWNGRADED

Another analyst at Credit Suisse, Seth Sigman, this morning downgraded Home Depot and Lowe’s, both to Neutral from Outperform, citing his concern that their recent results and stock prices have disconnected from housing. In a research note of his own, Sigman said his key concern is that home prices will continue to moderate, at least temporarily, as higher rates weigh on affordability.

Overall, Sigman still sees EPS growing, but sees less upside over the next 12 months relative to current estimates.

The analyst continues to view Home Depot as best-in-class in retail, but struggles to find multiple upside from its current premium level as housing sentiment shifts and some uncertainty arises. While he continues to expect meaningful improvement in sales and operating profit at Lowe’s under new CEO Marvin Ellison, Sigman thinks consensus estimates are baking that in. The analyst cut his price target on Home Depot to $204 from $222 and on Lowe’s to $111 from $115.

PRICE ACTION

Shares of Lennar dropped 3%, while Meritage Homes dropped 6.6% and KB Home declined 4.4%. Other homebuilders were dragged lower, including D.R. Horton, PulteGroup and Toll Brothers (TOL), which are all down over 3%.

Additionally, Home Depot and Lowe’s both declined over 4%. Further, XHB, the homebuilding ETF, is down nearly 3% today and about 10% month-to-date.


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Synovus to acquire FCB Financial for $2.9B

Synovus to acquire FCB Financial for $2.9B

 

Synovus to acquire FCB Financial for $2.9B, Stockwinners
Synovus to acquire FCB Financial for $2.9B, Stockwinners

Synovus Financial Corp. (SNV) and FCB Financial Holdings, Inc. (FCB) jointly announced their entry into a definitive merger agreement under which Synovus will acquire FCB Financial Holdings, Inc., owner of Florida Community Bank.

The transaction is expected to close by the first quarter of 2019.

Following the closing, FCB will merge with Synovus Bank and operate under the Synovus brand, and FCB Financial Holdings President and CEO Kent Ellert will be executive vice president of Synovus and Florida market president.

Under the terms of the merger agreement, FCB shareholders will receive a fixed ratio of 1.055 shares of Synovus common stock for each common share of FCB in an all-stock transaction.

Based on Synovus’ closing share price on July 23, 2018, the transaction is valued at $58.15 per FCB share or $2.9 billion in aggregate.

Following completion of the merger, former FCB shareholders will own approximately 30% of the combined company. In addition, based on the exchange ratio, Synovus’ most recent quarterly dividend translates to a pro forma annualized dividend of $1.06 per FCB share.

The transaction is expected to be tax free to FCB shareholders. Synovus expects approximately $40 million in pretax synergies to be fully realized by 2020.

Excluding one-time charges, Synovus expects the acquisition to be approximately 6.5% accretive to earnings per common share in 2020 and to deliver strong returns on capital.

The transaction is expected to produce tangible book value per share dilution of 3.3% with an earnback period of less than two years.

The merger agreement has been unanimously approved by both companies’ Boards of Directors.

The merger is subject to customary closing conditions, including approval by Synovus and FCB Financial Holdings shareholders and approval by state and federal bank regulators. BofA Merrill Lynch and J.P. Morgan Securities LLC served as financial advisors to Synovus on this transaction, while Simpson Thacher & Bartlett LLP and Alston & Bird LLP served as legal advisors.

Sandler O’Neill + Partners L.P., Guggenheim Securities, LLC, and Evercore Group L.L.C. served as financial advisors to FCB Financial Holdings, and Wachtell, Lipton, Rosen & Katz served as legal advisor.


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Veritex, Green Bancorp to merge 

Veritex, Green Bancorp to merge 

Veritex, Green Bancorp to merge, Stockwinners
Veritex, Green Bancorp to merge, Stockwinners

Veritex Holdings (VBTX) and Green Bancorp (GNBC) jointly announced the entry into a definitive agreement pursuant to which Green and Green Bank, N.A. will merge with and into Veritex and Veritex Community Bank, respectively.

Veritex, Green Bancorp to merge, Stockwinners
Veritex, Green Bancorp to merge, Stockwinners

The transaction will create a leading Texas community bank, with 43 branches across Texas, ranking as the tenth largest Texas-based banking institution by deposit market share.

The combined franchise would have approximately $7.5B in assets, $5.6B in loans and $5.9B in deposits, based on the companies’ balance sheets as of June 30, 2018.

Under the terms of the merger agreement, upon completion of the merger, shareholders of Green will receive 0.79 shares of Veritex common stock for each share of Green common stock, valuing the transaction at approximately $1B, or $25.89 per Green share, based on the closing share price of Veritex of $32.77 on July 23, 2018.

Legacy Veritex and Green shareholders will collectively own approximately 45% and 55% of the combined company, respectively.

Upon completion of the merger, C. Malcolm Holland, current Chairman and Chief Executive Officer of Veritex, will continue to serve as Chairman and Chief Executive Officer of the combined company.

Terry Earley, current Chief Financial Officer of Green, will serve as Chief Financial Officer of the combined company, and Geoffrey Greenwade, current President of Green, will serve as the Houston President of the combined company.

The board of directors of the combined company will consist of nine members, six from Veritex’s current board of directors and three from Green’s current board of directors.

Veritex expects this acquisition to be approximately 25% accretive to earnings per common share, excluding one-time charges.

The transaction is expected to produce approximately 12.0% tangible book value per share dilution at closing with an earnback period of approximately 2.8 years.

The merger agreement has been unanimously approved by the board of directors of both Veritex and Green.

The merger agreement contains customary representations and warranties and covenants by Veritex and Green. Closing is subject to customary approvals by regulatory authorities and the shareholders of both Veritex and Green, and is expected to occur in the first quarter of 2019.


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Zillow enters house flipping, shares decline

Zillow falls after announces house flipping plans, competitor Redfin declines

Zillow tumble on Amazon news. See Stockwinners.com Market Radar
Zillow enters house flipping, shares decline

Shares of Zillow (Z,ZG) dropped in Friday’s trading after the company announced plans to enter the home-flipping business just in time for the Spring selling season.

Zillow, which has focused on just the listing part of the real estate business, announced last night along with quarterly and yearly revenue, that it will expand Zillow Instant Offers to Phoenix this month.

With this expansion, Zillow said it plans to participate in the marketplace, buying and selling homes with Premier Agent partners in the Phoenix and Las Vegas markets.

Zillow began testing Instant Offers in May 2017 with Premier Agent partners in Las Vegas and Orlando, and will add Phoenix this month.

According to Zillow, the program “gives real estate agents the opportunity to acquire new listings by connecting them with motivated sellers who have taken a direct action to sell their home.

Across all testing, Zillow found the vast majority of sellers who requested an Instant Offer ended up selling their home with an agent, making Instant Offers an excellent source of seller leads for Premier Agents and brokerage partners.”

“Even in today’s hot market, many sellers are stressed and searching for a more seamless way to sell their homes,” Zillow Chief Marketing Officer Jeremy Wacksman said in a statement.

“They want help, and while most prefer to sell their home on the open market with an agent, some value convenience and time over price. This expansion of Instant Offers, and Zillow’s entrance into the marketplace, will help us better serve both types of consumers as well as provide an opportunity for Premier Agents to connect with sellers.

A “WASH” FOR SHAREHOLDERS

Craig-Hallum analyst Brad Berning downgraded Zillow to Hold from Buy after the company announced the expansion of the Instant Offers program to Phoenix in addition to Las Vegas and Orlando.

The program will require what he estimates to be about $3B of capital, which Zillow intends to fund using its balance sheet, while only creating what he estimates will be about $3B in incremental shareholder value, Berning told investors.

Thus, he sees the expansion as “a wash” for shareholder value, but one that comes at the price of potential added risk. Berning lowered his price target on Zillow to $50 from $58.

COMPETITION FOR REDFIN

Redfin (RDFN), an online real-estate brokerage, “began experimenting with buying homes a little more than a year ago,” said The Wall Street Journal, citing Redfin CEO Glenn Kelman.

Redfin falls after Zillow enters house flipping; Stockwinners
Redfin falls after Zillow enters house flipping;

PRICE ACTION

Shares of Zillow are down over 10% to $48.19 per share, while Redfin is lower by 2.5% to $22.15 in Friday’s trading.


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Rig count continues to rise

Baker Hughes reports U.S. rig count up 5 to 995 rigs

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Rig Counts Rise 

Baker Hughes (BHGE) reports that the U.S. rig count is up 5 rigs from last week to 995, with oil rigs up 4 to 804, gas rigs up 1 to 190, and miscellaneous rigs unchanged at 1.

The U.S. Rig Count is up 186 rigs from last year’s count of 809, with oil rigs up 152, gas rigs up 35, and miscellaneous rigs down 1 to 1.

The U.S. Offshore Rig Count is unchanged at 13 rigs and down 5 rigs from last year’s count of 18.

The Canada Rig Count is down 58 rigs from last week to 161, with oil rigs down 51 to 93, gas rigs down 7 to 68, and miscellaneous rigs unchanged at 0.

The Canada Rig Count is down 24 rigs from last year’s count of 185, with oil rigs up 23, gas rigs down 46, and miscellaneous rigs down 1 to 1.


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Fed boosts rates by 25 basis points to 1.5%-1.75%

Fed boosts target for federal funds rate by 25 basis points to 1.5%-1.75%

https://stockwinners.com/blog/
Fed boosts target for federal funds to 1.5%-1.75% 

The Federal Reserve says in today’s statement, “In view of realized and expected labor market conditions and inflation, the Committee decided to raise the target range for the federal funds rate to 1-1/2 to 1-3/4 percent.

The stance of monetary policy remains accommodative, thereby supporting strong labor market conditions and a sustained return to 2 percent inflation…

Voting for the FOMC monetary policy action were Jerome H. Powell, Chairman; William C. Dudley, Vice Chairman; Thomas I. Barkin; Raphael W. Bostic; Lael Brainard; Loretta J. Mester; Randal K. Quarles; and John C. Williams.”

Jerome H. Powell, Chairman

In its updated economic projections of Federal Reserve Board members and Federal Reserve Bank presidents under their individual assessments of projected appropriate monetary policy for their March meeting, the Federal Reserve members kept their median expectation for the Federal funds rate at the end of 2018 at 2.1%, consistent with their December projection.

The projections, often referred to as a summary of the Fed’s “dots,” shows that the median expectation for the end of 2019 Federal funds rate is now 2.9%, up from 2.7% in the December projection.

The Federal Reserve says in today’s statement, “Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability.

The economic outlook has strengthened in recent months.

The Committee expects that, with further gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace in the medium term and labor market conditions will remain strong. Inflation on a 12-month basis is expected to move up in coming months and to stabilize around the Committee’s 2 percent objective over the medium term.

Near-term risks to the economic outlook appear roughly balanced, but the Committee is monitoring inflation developments closely.”


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Barron’s is bearish on Fitbit, L Brand and Nokia

Barron’s, the weekly publication owned by the Wall Street Journal, in its latest issue mentions several names:

Stockwinners offers Barron's review of Stockwinners offers stocks to buy, stocks to watch, upgrades, downgrades, earnings, Stocks to Buy On Margin
Stockwinners offers Barron’s review of stocks to buy

BULLISH   MENTIONS:

Invesco stock weakness a buying opportunity – U.S. stocks are down 5% from their January 26 peak, while shares of Invesco (IVZ) have fallen much more, which gives investors a buying opportunity, Jack Hough writes in this week’s edition of Barron’s. Driven by strong exchange-traded fund lows, BlackRock’s (BLK) shares have skyrocketed in recent years while Invesco’s have lagged behind, he notes, adding that the latter’s forward price-earnings multiple now represents a bargain-basement 44% discount to BlackRock’s.

Nordstrom, TJX appear to have most staying power– Department store stocks have rebounded in recent months, but they are not all likely to emerge as winners, Avi Salzman writes in this week’s edition of Barron’s. Nordstrom (JWN) and TJX (TJX) appear to have the most staying power, with the former the more attractive choice in terms of valuation, he notes. Kohl’s (KSS) and Macy’s (M) are showing new life but need to prove they can repeat their fourth quarter performances, Salzman says, adding that JCPenney (JCP) and Dillard’s (DDS) remain “tricky.”

BEARISH  MENTIONS:

L Brands shares may still go lower given multiple problems – Shares of L Brands  (LB) tumble after quarterly results, with the stock trading at just 13.5 times 12-month earnings forecasts, Ben Levisohn writes in this week’s edition. While it may look tempting, Levisohn cannot help think that the multiple problems facing the company could send them lower still.

Not much time left for Fitbit – In a follow-up story, Barron’s notes that plenty of people still use fitness trackers and Fitbit (FIT) still sells millions of them, but the company has acknowledged that the market is “rapidly changing.” Fitbit CEO James Park has pledged to expand the company’s line of watches, putting it in direct competition with Apple (AAPL), but there is no indication that Fitbit knows how to nurture an “ecosystem” of software developers.

VMware investors not happy with possible Dell deal – VMWare (VMW) fell on Thursday and Friday in the wake of a CNBC report that Dell and VMware are considering a reverse merger in which the latter would issue shares to Dell Technologies and allow it to go public without doing an IPO, Andrew Bary writes in this week’s edition of Barron’s. A Dell/VMware combination could benefit Dell’s tracking stock for VMware, he notes, while adding that VMware investors are not happy about a possible transaction as it would link a thriving, cash-rich company with a highly leveraged Dell.

5G cannot deploy fast enough for Ericsson/Nokia – While the battle to dominate the future of wireless networks would be a boon for any wireless arms merchant such as Nokia (NOK) or Ericsson (ERIC), the race to build the new technology dubbed 5G is not going to produce a boom in revenue overnight, and both companies are struggling to get back on their feet, Tiernan Ray writes in this week’s edition of Barron’s. If they stabilize this year, and sentiment starts to warm about 5G, it could boost their stock prices even if 5G takes a while to pay off, he adds.


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Watch these bank earnings

What to watch in bank space earnings reports

What to watch in bank earnings. Stockwinners.com
What to watch in bank earnings.

Bank of America (BAC) and Goldman Sachs (GS) are scheduled to report quarterly results on January 17, while Morgan Stanley (MS) is expected to report on January 18.

What to watch for:

1. TAX REFORM:

Goldman Sachs estimates that the enactment of the new tax legislation will result in a reduction of approximately $5B in the firm’s earnings for Q4 and year ending December 31, 2017, approximately two-thirds of which is due to the repatriation tax.

The remainder includes the effects of the implementation of the territorial tax system and the re-measurement of U.S. deferred tax assets at lower enacted corporate tax rates.

Earlier this month, Morgan Stanley (MS) said it also estimates the net income for the quarter ending December 31, 2017 will include an aggregate net discrete tax provision of approximately $1.25B, comprised of an approximate $1.4B net discrete tax provision as a result of the enactment of the Tax Cuts and Jobs Act, primarily from the re-measurement of certain net deferred tax assets using the lower enacted corporate tax rate, partially offset by an approximate $160M net discrete tax benefit, primarily associated with the re-measurement of reserves and related interest relating to the status of multi-year Internal Revenue Service tax examinations.

2. CRYPTOCURRENCY:

On December 14, Bloomberg reported that Goldman Sachs is seeking a 100% margin on some bitcoin future trades deterring some customers from looking to clear their trades through the bank and resulting in some taking their business elsewhere.

A week later, the publication said the bank was establishing a trading desk to make markets in digital currencies such as bitcoin. The company intends to get the business running by the end of June, if not earlier, the report added.

Also last month, Morgan Stanley said in a regulatory filing that it had purchased an 11.4% stake in Overstock (OSTK), which launched cryptocurrency trading with its tZERO subsidiary.

3. FAVORABLE OUTLOOK:

On November 29, JPMorgan analyst Kian Abouhossein raised his price target for Goldman Sachs to $270 from $263 and called it his top investment banking pick for 2018.

The analyst said he is more positive around the strength of the franchise and believes its fixed income, currencies and commodities business revenue growth opportunity of $1B-plus is more likely to be achieved. Goldman has shown “excellent progress” when it comes to delivering shareholder value, #Abouhossein contended.

Last month, BofA/Merrill analyst Michael #Carrier added Goldman Sachs to the U.S. 1 List, citing an increasing favorable outlook with rising GDP growth, favorable risk/reward, low expectations, and potential catalysts from de-regulation, tax reform, and increased volatility.

Carrier reiterated a Buy rating on the stock and raised his price target on the shares to $300 from $290.

4. BREXIT

On November 20, Goldman Sachs CEO Lloyd Blankfein said the bank will have two EU hubs, in Frankfurt and Paris, post-Brexit, according to Reuters. “We will have more employees on the continent. Some, if they want to, would come from London, we will hire others,” Blankfein said.

“Brexit pushes us to decentralize our activities. In the end, it’s the people who will largely decide where they prefer to live.”


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Meet the next Fed Chief

Fed Policy: the nomination of Powell as Fed Chairman is all but sealed

Meet the next Fed Chief. See Stockwinners.com for details

Fed Policy: the nomination of Jerome Powell as Fed Chairman is all but sealed. The secret was fairly well kept, but late yesterday newswires largely confirmed it.

The markets have already reacted, by and large, with yields having dropped from last week’s jump when John Taylor was seen as the leading contender.

The dollar did soften a bit further yesterday.

Powell has been a governor on the Federal Reserve Board since 2012, and never dissented. Hence, this is a “continuity” pick and he’s seen following the gradualist approach of Yellen (and Bernanke).

He is also seen as a moderate on regulatory issues too. His confirmation process shouldn’t be problematic since he was already cleared as a Fed governor.

Of interest, he would be the first Fed chairman without a Ph.D. in economics since Volcker.

Along with serving on the Fed Board for the past five years, Powell, 64, has worked inside and outside government.

He was a Treasury undersecretary from 1990 to 1993 under President Bush.

More recently he was a partner and managing director of the Carlyle Group.

Note that newly installed governor Quarles also once worked at the Carlyle Group (CG).

There will be four vacancies on the seven member Fed Board, assuming Yellen retires from her governor position, giving President Trump lots of opportunities to make his mark on the Fed.


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PayPal reports today

What to watch in PayPal earnings report

PayPal reports today. See Stockwinners.com for a review

PayPal (PYPL) is scheduled to report results of its third fiscal quarter after market close on October 19, with a conference call scheduled for 5:00 pm EDT.

What to watch for

1. OUTLOOK:

During the company’s last earnings call, PayPal said it sees 2017 earnings per share between $1.80-$1.84, and 2017 revenue between $12.775B-$12.875B. The company also said it foresees third quarter earnings per share of 42c-44c, and revenue of $3.14B-$3.19B.

2. VENMO POTENTIAL

Last month, KeyBanc analyst Josh Beck raised his price target for PayPal to $70 from $66 saying his proprietary Key First Look debit/credit card database suggests Venmo is more incremental than cannibalistic, generally better than market expectations.

On October 3, Deutsche Bank analyst Bryan Keane also raised his price target for PayPal shares to $77, citing the company’s Venmo monetization opportunity that could help push PayPal’s mid-term guidance of 16%-17% revenue growth and stable to slightly expanding operating margins higher. Venmo offers “exciting” potential avenues to accelerate revenue growth, relieve take rate pressure and drive higher operating margins, the analyst contended.

Meanwhile, Stephens analyst Brett Huff also increased his price target on the shares to $73 from $65 after PayPal said Venmo mobile payments were now accepted at greater than 2M merchants. The analyst, who thinks this is a better-than-expected-start for the long-anticipated Venmo monetization, reiterated an Overweight rating on the stock. 3.

UPSIDE AHEAD

On August 21, Craig-Hallum analyst Brad Berning argued in a research note that PayPal and Vantiv (VNTV) are both winning market share within the global secular growth of payments converting to digital from cash and check, and could be $100 stocks by 2020.

A few days later, Barron’s said that despite the rise in PayPal’s shares, the stock still had upside as innovations could lift it another 16%.

Earlier this month, Morgan Stanley analyst James Faucette was also bullish on PayPal, upgrading the stock to Overweight as he believes the company is among the few large entities that can deliver high-teens revenue and 20% EPS growth.

Meanwhile, Nomura Instinet analyst Bill Carcache raised his price target for PayPal to $75 saying PayPal deserves to trade at 30-times earnings, or three-turn premium to other payment networks. The company is “uniquely positioned” to gain market share as payment network volumes continue their shift from physical to digital channels, Carcache contended.

4. POTENTIAL M&A

On September 27, Bernstein analyst Lisa Ellis told investors that she believes PayPal will likely make a strategic acquisition in the coming months. While there are a number of potential candidates, the analyst sees the acquisition of a European payments asset as the most likely. On the flip side, Ellis argued that it is unlikely PayPal would be acquired as few players can afford over $75B, and PayPal is likely more valuable independent than owned by those that could.

5. PARTNERSHIPS

On August 2, Microsoft’s (MSFT) Skype said in a blog post that it has “developed Send Money, a Skype feature that allows you to transfer funds via the latest Skype mobile app while you’re in the middle of a conversation using PayPal.”

A day later, Mastercard (MA) and PayPal also announced an extension of their partnership into Asia and earlier this month, an expansion of their partnership into Canada, Europe, Latin America and the Caribbean and the Middle East and Africa.

PYPL last traded at $66.56.


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Bank stocks to watch

What to watch in bank space earnings reports

JPMorganChase on Stockwinners.com

JPMorgan (JPM) and Citigroup (C) are scheduled to report quarterly results on October 12, while Wells Fargo (WFC) is scheduled to report on October 13.

What to watch for:

1. OUTLOOK:

During its last earnings call, JPMorgan said it sees 2017 average core loan growth of about 8%, 2017 net interest income up over $4B year over year, 2017 adjusted expense of about $58B, and 2017 net charge-offs of about $5B.

On September 12, JPMorgan’s Dimon added that trading revenue should be down about 20% in Q3.

Meanwhile, back in July, Citi said it was “on track” to increase return on capital and that it expects continued year over year revenue growth in retail banking, excluding mortgage, as well as modest organic growth in cards.

Meanwhile, mortgage should continue to be a headwind in Q3, the company noted. Later in the month, Citi CEO Michael Corbat said he sees earnings per share approaching $9.00 in 2020.

During Wells Fargo last earnings call, the bank said it is targeting $2B expense reduction by year-end 2018.

Additionally, the bank plans to close about 450 branches in 2017-2018, and expects to increase Q3 dividend to 39c per share.

Last month, Wells Fargo said it sees net interest income up low to mid-single digits in 2017, with loan growth in Q3 expected to be impacted by continued decline in auto loans, run off of the junior lien mortgage portfolio, and a slower and more competitive commercial and CRE lending environment.

2. VALUATION, LACK OF CATALYSTS:

Back in July, #Berenberg analyst James Chappell downgraded Wells Fargo to Sell saying the bank’s competitive advantages have been eroded. Wells has become “too big to differentiate itself” from wider market trends and deliver the expected growth, Chappell contended.

A few days later, BMO Capital analyst James Fotheringham cut his rating for Citi to Market Perform based on valuation and lack of catalysts.

Last month, JPMorgan also saw a rating change, with Deutsche Bank analyst Matt O’Connor downgrading the stock to Hold as he sees net interest income growth slowing and credit costs inching up as the Fed raises short rates and the yield curve flattens.

Further meaningful outperformance of JPMorgan shares will be harder amid increased competition within investment banking and trading as well as slowing loan growth, he contended. 3.

UPSIDE POTENTIAL

Late July, Andrew Bary wrote on Barron’s that Citi could rise by 50%, or hit $100, saying he sees upside ahead as it offers a low valuation and what could be the highest earnings growth rate among its peers in upcoming years.

Two weeks later, Wells Fargo analyst Mike Mayo resumed coverage of Citi with an Outperform rating, calling it his top pick in Large-Cap U.S. Banks. Mayo expects the stock to double in four-to-five years.

Meanwhile, Citi analyst Keith Horowitz argued that now is the time to buy Wells Fargo, telling investors Wells Fargo’s business improved, not broken. The company’s issue is an “aggressive sales culture encouraged the wrong behavior leading to strong account generation,” which had an immaterial impact to earnings, Horowitz added. 4.

WELLS TO REMEDIATE CUSTOMERS

On July 28, Wells Fargo announced a plan to remediate auto loan customers of Wells Fargo Dealers Services who may have been financially harmed due to issues related to auto Collateral Protection Insurance policies.

This month, the bank also announced plans to reach out to all home lending customers who paid fees for mortgage rate lock extensions requested from September 16, 2013, through February 28, 2017, and to refund customers who believe they should not have paid those fees.


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KB Home CEO Punished

KB Home punishes CEO for rant at Griffin by cutting bonus

KB Home CEO Punished. See Stockwinners.com

Shares of KB Home (KBH) are in focus after the homebuilder said it would cut its chief executive officer’s bonus after a recording surfaced this week of Mezger berating his neighbor.

WHAT’S NEW

KB Home said in a regulatory filing that it will cut the annual bonus of President and CEO Jeffrey Mezger by 25% after he was caught on audio berating his neighbor, actress and comedian Kathy Griffin, and her boyfriend.

On a more than two-minute recording published by HuffPost, Mezger used sexist and homophobic slurs after Griffin and her boyfriend called the police with a noise complaint about the CEO, who went on a tirade when police officers arrived at the scene.

KB Home said its board decided to cut the bonus Mezger would have “otherwise been entitled to receive” because his “recent behavior in his personal dealings with a neighbor is unacceptable and a negative reflection on KB Home.”

The board also added that “If in the future there is any similar incident, he will be dismissed,” but noted that Mezger has been a “very effective CEO.”

WHAT’S NOTABLE

Mezger, who has been CEO of KB Home since 2006, received a salary of $1M in 2016 and nearly $8M in other compensation. He did not receive a cash bonus in 2016. The last time he received a bonus was 2014, according to filings.

UPCOMING EARNINGS

KB Home, which handily beat consensus estimates for its second quarter in June, is expected to report third quarter earnings on September 28.

The homebuilder previously forecast Q3 housing revenue of $1.08-$1.15B and raised its fiscal 2017 housing revenue view to $4.2B-$4.4B from $4B-$4.3B. However, hurricane activity ramped up doing Q3, with Harvey and Irma impacting areas of Texas and Florida in the past weeks, which could potentially impact KB Home’s results.

Yesterday, Mizuho analyst Haendel St. Juste told clients that builders’ margins could be hurt as labor and material costs rise following Harvey and Irma.

In a note to clients this morning, MKM Partners analyst Megan McGrath said that hurricane activity is likely to dominate the earnings conversations, and will likely focus on short-term topline impacts as well as medium-term impacts like labor shortages and commodity inflation.

McGrath noted that 35% of the homebuilder’s communities are in the Florida, Houston and San Antonio markets. She is also looking to see if the company’s order growth re-accelerated prior to the hurricanes.

OTHERS TO WATCH

Other publicly traded homebuilding companies include Lennar (LEN), Toll Brothers (TOL), Beazer Homes (BZH), D.R. Horton (DHI), Hovnanian (HOV) and PulteGroup (PHM).

PRICE ACTION

Shares of KB Home slid nearly 3% yesterday as the CEO’s rant was widely re-circulated on various media channels. In Thursday morning’s trading, the stock is up 0.5% to $20.81.


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