June 1 Post

Hi Again,

 The Standard & Poor’s 500 index closed at its 16th record high on 5/12/17, and 74 New York Stock Exchange stocks made fresh 52-week highs, compared with 52-week new lows. But one measure of market breadth seems to be struggling, according to Bespoke Investment Group. The percentage of stock trading above their 50-day average peaked late last year at 80%, and has since shrunk to about 50%. The index is climbing, but half its stocks are struggling to keep up. That is isn’t something bulls want to see as the rally continues. Is there such a thing as a “curse of the Dow”. Intel and Microsoft was added to the DJIA in late 1999, just in time for the tech’s bubble bursting. Bank of America was added in early 2008-and you know what came next! Apple’s addition to the blue chip index saw two years of underperformance.(Barron’s, 5/15/17 and 5/29/17).

If we look at the volume changing hands on advancing and declining stocks we get further encouragement. The NYSE advancing volume minus declining volume line broke out to the upside from a three-month slide. What this means is the stocks that go up are getting more volume than stocks that are going down and, of course, that leans bullish. Buyers are more aggressive than sellers – the hallmark of a bullish market. There is more to like in the volume area as major market exchange-traded funds (ETFs) finally saw a positive change in their on-balance volume charts. This indicator keeps track of daily volume on up days minus volume on down days. For example, on-balance volume on the SPDR S&P 500 ETF Trust (ticker: SPY) started to fall in early March and continued lower until the May 17 market slide. The next day it started to rise and has now broken through the trendline that guided it lower for the past two months. That suggests money is finally flowing back into the ETF, confirming the new highs in price. That’s even better.

New highs in several major indexes, rising breadth and positive money flows into index ETFs together paint a rather strong picture for stocks. However – and there always is a however – the bond market does offer a warning. The spread bottomed in August and really started to climb after the election, when hopes for tax reform and an upswing in hiring were fresh. A steepening curve often begins when the economy is starting to warm up. Unfortunately, that trend reversed and the yield curve is now flatter than it was before the election. While the stock market has gotten its act back together, investors should keep an eye on the yield curve. The bond market seems worried about dysfunction in Washington putting the kibosh on such desired initiatives as tax reform. If they look to be in trouble, the stock market could be vulnerable. (Michael Kahn, Stocks point to strength; Bonds offer a warning, 5/30/17).

 Ford- Earlier this week, Ford Motor Co. replaced company veteran Mark Fields as CEO with Jim Hackett, a relative newcomer to the auto industry. Ford said it needed the change to speed up decision-making and reorient toward the future. Ford is highly profitable, thanks to strong sales of pickups and SUVs. But last year's profit of $4.6 billion was down $2.8 billion from a record in 2015. And Ford's stock price fell almost 40 percent in the three years Fields was CEO. Hackett, 62, is credited with reviving furniture maker Steelcase. He served on Ford's board for three years and for the past year was leading Ford's mobility unit. As interim athletic director for the University of Michigan, he was responsible for luring star coach Jim Harbaugh away from professional football. Hackett and Executive Chairman Bill Ford, the great-grandson of company founder Henry Ford, recently talked with The Associated Press about the changes. (Tom Krisher, Ford changes at the top, AP, 5/28/17)  A recent analysis by Goldman Sachs finds that even as ride hailing expands, private car ownership is likely to continue growing from here, albeit slowly, through 2030; that Ubers of tomorrow are likely to turn to today’s veteran car makers to produce and manage vast fleets of self-driving vehicles; and that the flee management business could be more profitable for companies like Ford than car making is today. As Hackette lays out his case to Wall Street in the months ahead, look for Ford stock to recover from the recent slide.  Shareholders could make 30% in a year. Ford stock sells less than 7 times projected earnings for the next 4 quarters. On one hand, that is a tantalizing discount. Over the past 2 decades, Ford has typically traded at a discount of about 25% to the total US market relative to earnings. Now its 60% cheaper than the market. Ford is in the best financial shape in decades. On the other hand, price is low enough to be suspicious. One reading of it is that investors expect car sales to turn lower in the next term. That is already happening. At the end of last year, light vehicles in North America were selling at 18.4 million (seasonally adjusted); by last month, the pace had cooled down to 16.8 million. (Jack Hough, Ford’s Future..,5/29/17).

 GE- GE traces its history back to Thomas Edison, but since the turn of the 21st century the industrial giant has been more associated with stagnation than innovation. Deutsche Bank analyst John Inch expects more weakness. He downgraded General Electric (ticker: GE) from Hold to Sell Friday (5/12/17) and cut his price target by $4, to $24. “Overall, we believe GE to be overvalued given weak earnings quality and the wide gap between non-cash and cash earnings,” he writes. “GE’s weak cash flow has become worse in recent quarters. GE offers an enticing 3.4% dividend yield. And at 15 times expected forward earnings, GE looks reasonably priced, especially as earnings are expected to climb 15% in 2018. But, again, earnings don’t tell the whole story. Some investors hope that CEO Jeffrey Immelt will soon be replaced, possibly lifting the stock. However, GE’s problems run deeper than leadership, and Inch warns that if GE were to replace Immelt (not a near-term move, in his opinion), a new CEO “could opt to significantly reset earnings targets lower: possibly closer to actual cash generation,” which he argues would hurt the stock.(Teresa Rivas, GE Falls to new 52 weeks Low/Barron’s. 5/12/17).

IBM- As it was announced on 5/5/17 by CNBC, during the first week of May 2017, the biggest shareholder of IBM, Warren Buffet (and one of the best investors in the world) sold 1/3 of his shares in IBM. He rarely sells anything as he likes to hold on to his portfolio for a very long time. Even though Warren Buffet lost confidence in IBM, I do not recommend selling IBM. He got in to IBM6 years ago at an average cost of $170 per share (per CNBC). Our average cost was $121.65 and we just started purchasing 15 months ago. In fact, at the time I started recommending IBM, I remember very well how most analysts used to laugh at Warren Buffet for getting in to IBM and holding his ground while the stock kept tumbling. I think he got in too early and got out too early. However this is something we have to watch carefully. By any means, this is not a sure thing!

HPE, Dell, IBM: Three Different Paths. The three looked similar a few years ago but HPE shrank, Dell grew, and IBM pivoted to verticalized solutions. Dell Chairman and Chief Executive Michael Dell also made an interesting comment that it has seen some customers that initially went to the cloud start repatriating back as they come to realize that the costs are “twice as much,” which is to our thesis that while cloud is having an impact on traditional infrastructure, it is not ideal for every workload, Looking at the IT Hardware sector, three companies that looked similar just a handful of years ago have now set forth on different paths. HPE is now smaller through divestitures,

Dell is now larger through its EMC acquisition, and IBM pivoted its focus to verticalized solutions by shedding/de-emphasizing most of its traditional hardware businesses. We think all three companies are in the early days of their respective transformations with Dell EMC still working through integration (we’d guess for at least another quarter), IBM’s strategy yet to be visible in the balance sheet, and HPE looking to stabilize its core server and storage businesses. Dell EMC’s key message and strategy is similar to that of EMC’s prior to acquisition -- taking a solutions approach to corporations’ digital transformations through an integrated portfolio of Dell, EMC and VMware (VMW) assets. While Dell EMC (including VMware) owns a good portion of its solutions stack hough also has a number of partnerships), HPE has a more transaction-oriented business and is looking more to partnerships to provide a broader solutions portfolio. (Barron’s, HPE,DELL,IBM, 5/11/17).

Disney- Disney reported fiscal 2nd qtr adjusted EOS of $1.50, ahead of $1.42 estimate. Revenue came in below forecasts in all segments, while the company’s operating income beat, relative to the forecast, was driven by it’s parks and entertainment studio units. We now forecast fiscal 2017 operating income of $14.63 billion versus our prior $16.66 billion, and EPS of $5.95, which is unchanged. We maintain our buy rating and $128 price target using separate values for the company’s Media Networks (Cable and Broadcast) and Consumer (Parks, and Resorts, Studio and Consumer Products) businesses. Our target consumer value uses a 21 times PE multiple reflecting the unique power of Disney’s brads, robust content slate, and theme park expansion plans in 2019 and beyond. (Guggenheim Securities, Walt Disney, 5/9/17).

Have a great month!