Yesterday disappointing quarterly results from Apple (AAPL), Microsoft (MSFT), and Yahoo (YHOO) took down those stocks. Apple, for example, reported a 38% increase in earnings year over year but fell 8% in after hours trading, wiping $66 billion off the stock’s market capitalization, as Wall Street analysts and investors decided that a mere 38% increase in revenue was a sign that growth was slowing at the company.
Today, the damage has spread to technology stocks in general—the iShares PHLX Semiconductor ETF (SOXX), for example, was down 2.52% as of 2:30 p.m. New York time, and the technology-heavy NASDAQ index was lower by 0.62%–and to shares of technology suppliers, and in particular Apple suppliers.
ARM Holdings (ARMH), down 4.6%, NXP Semiconductor (NXPI) down 2.6%, and Synaptics (SYNA) down 5.52% are among the hardest hit.
It hasn’t helped that Linear Technology (LLTC), a big name in analog chips, missed estimates for the quarter, supplied weak guidance for the next quarter, and noted that it had seen bookings slow “considerably” near the end of the quarter.
I think that the wider sell off is an over-reaction. Apple’s revenue “disappointment” was to announce just $49.6 billion in revenue when analysts had forecast $49.4 billion.
Yep, that’s right, Apple “disappointed” by only reporting revenues slightly above the official consensus projection for the quarter.
I don’t think the technology sector is out of the danger zone yet. Qualcomm (QCOM), a company with that has an Apple-like growth problem since it dominates its market, reports today after the close. I’d worry about another “disappointment.”
Two of the technology stocks that I’d most like to pick up on a sell off in the sector—NXP Semiconductors (NXPI) and Synaptics (SYNA)–report earnings on July 29 and July 30, respectively. And they’re both subject to a big drop on an Apple-like “disappointment. (That’s especially true for NXP, which trades at a trailing 12-month price to earnings ratio of 61. Synaptics trades with a PE of just 18.)
I’d wait on the earnings reports see if the market gives me good entry point for these stocks on near term fears in the sector.
The perfect dividend stock is one that pays a high current yield—let’s fantasize and imagine a yield of 5%–and that is also raising its annual dividend payments at a rate that will produce a future yield (on your purchase price) way above that initial 5%.
Such perfection is rare. Most of the time investors have to pick one–either current yield or future yield. And our choice between the two alternatives should be influenced by the state of the financial world. For example, when interest rates and inflation are stable, a current high yield might be preferable because the value of that dividend isn’t being eroded by rising interest rates or inflation. On the other hand, when either interest rates or inflation are headed upwards, a future dividend that was growing at a faster rate than market interest rates or than inflation has extra value since it’s a way that a dividend income stock, in comparison to the fixed payouts from a bond, can, maybe, keep up or surpass interest rates and/or inflation.
On the eve of the first increase in the Fed funds interest benchmark interest rate since 2006, I think the edge goes to dividend stocks showing a strong pattern of strong increases in dividend payouts.
And that’s why the 25% dividend increase voted by Cummins (CMI) on July 14 caught my eye. That increase pushed the current yield to slightly over 3%. (The yield was 3.02% at the close on July 20.) And it promises, if the company continues its recent (nine-years and counting) history of 25% annual dividend increases, to give you a yield of 9.2% on your original purchase price (of $128.97 at the July 20 close) at the end of five years. (By the way, the recently declared quarterly dividend of $0.975 is payable on September 1 to shareholders of record on August 21.
I’m adding shares of Cummins to my Dividend Income Portfolio as of today July 21.
The big question, of course, is whether the company will be able to continue to increase its dividend payout at anything like the recent rate.
On a purely financial basis the odds look good. The payout ratio over the trailing 12 months has climbed to a still reasonable 31.8% from 20.18% in 2012 so the company has room to increase its dividend. (Payout ratios above 70% or so aren’t easily sustainable for a company that is still investing in its business and in developing new products, as Cummins is.) The company isn’t carrying a lot of debt—the debt to equity ratio is a low 22%–so Cummins doesn’t face that drag on its ability to pay a higher dividend.
Cummins’ market, though, does present a challenge right now. In its last quarterly earnings report Cummins guided to a revenue increase of just 2% to 4% for 2015 as weaknesses in the Chinese and Brazilian market for trucks (and thus for the diesel engines that Cummins makes) continue. Heavy and medium truck sales in China are forecast to fall 15% in 2015 and in Brazil by 28%.
But margins are forecast, by Standard & Poor’s, to climb in 2015 and 2016 on continued cost cutting and improvements in capacity utilization. S&P projects operating earnings per share of $9.96 in 2015 and $11.38 in 2016, up from $9.13 in 2014.
The wild card in these projections is the state of the North American market for heavy and medium duty trucks. Some competitors have pointed to their belief that the demand for trucks in that market has hit a cyclical peak. That’s certainly a danger to revenue at Cummins although the company has a history of adding market share when the market slows that reduces the likelihood that any cyclical decline in market-wide sales would take a big bite out of Cummins’ revenue.
Commodity prices continue to tumble and are now down to the lowest levels since dinosaurs walked the earth.
But both the gold futures and spot market broke below $1100 an ounce this morning before rebounding to slightly above that level. That puts gold near a five year low.
And gold isn’t alone.
Both West Texas Intermediate and Brent crude have ended the recovery that had taken oil from a six-year low. U.S. benchmark West Texas Intermediate is back below $50 a barrel with futures touching $49.92 this morning. That’s the lowest intraday price since April 6. Brent crude has continued a decline that began in June to drop well below $60 to $56.51 in London.
And copper, widely seen as the commodity most sensitive to growth rates in the global economy because it is used in so many sectors from construction to electrical goods, continued to fall, declining another 1.44% in London to $5480 a metric ton.
I can see three reasons for the drop across all these commodity sectors.
First, the continued strength in the U.S. dollar is depressing the dollar price of all commodities. The widely held belief that the Federal Reserve will raise interest rates in 2015, perhaps as early as its September 17 meeting, contributes to a belief that the dollar will continue to climb.
Second, forecasts continue to say that the global economy in general and the Chinese economy in particular continue to slow and that in the absence of faster growth, supply is in excess of supply. This is especially true for commodities such as oil and iron ore where increases in supply have overwhelmed demand. Iron ore, for example, has recovered from the panic selling that accompanied what looked like an uncontrolled plunge in the Shanghai stock market. That panic took iron ore down to $44 a metric ton, a 10-year low. But even today’s price above $50 a ton is shockingly low when you remember that iron ore traded at $120 a metric ton as recently as June 2014.
And third, traders and investors simply have no appetite for commodity positions in their portfolios and without a reason to buy, they are cutting back their allocation to commodities in general. Whereas not so long ago, I heard recommendations for a 5% to 10% allocation to gold, for instance, today I’m hearing recommendations for 2% to 3%. Even a price drop to $1100 hasn’t led to an uptick in demand from the world’s two swing markets in gold—India and China. In Mumbai, for instance, gold typically trades at a premium to London, since jewelry demand in India helps support gold prices in that market, but right now gold in Mumbai is trading at a discount to London. It looks like Indian and Chinese retail purchasers of gold, known for waiting until the price is low before buying, have concluded that prices are still headed lower.
That seems likely, not just for gold but also for commodities in general. Inflation, a key driver in past commodity rallies, is conspicuously absent this go round. The Federal Reserve will raise interest rates in late 2015 or early 2016 and that will push the dollar higher. While it looks like the Greek debt crisis has been postponed and that China’s bear market in Shanghai and Shenzhen has stabilized, temporarily I believe, there’s not much evidence of a recovery in economic growth in emerging world economies, especially China, that would push demand for commodities higher. And, finally, from oil to iron ore, supply in key commodities looks likely to growth over the next 12 months.
In other words it looks like it’s too early to buy crushed commodities or the even more savagely depressed shares of commodity producers. For some of these commodities—gold is a prime example—asset sales are ramping up as the most stressed companies look to raise cash. Oil production is still climbing as Saudi Arabia and Iran both position themselves for a fight for market share. The big iron ore producers have cut back on capital spending but the pipeline is still full of new projects scheduled to come on line next year and into 2018. The one commodity to keep a close eye on is copper, where some projections show a supply deficit as early as 2016.
Even when the Japanese economy looked to be strengthening and Asian car markets were healthy, shares of Toyota Motors (TM) were closely aligned with the rise and fall of the Japanese yen.
For example, from the yen’s local low on October 16, 2014 to today’s (July 16) price, the Japanese currency climbed 16.6% against the U.S. dollar. In the same period from the same October 16 local low, shares of Toyota gained 23.3%.
Now, however, that the yen is more likely to fall than rise, and when the Japanese economy has stalled (again) and car sales to Asia are slowing, I can’t think of a reason to hold Toyota in the short-term. As of today, July 16, I’m selling the ADRs (American Depositary Receipts) of Toyota out of my Jubak Picks portfolio. I have a gain on this position of 37.8% since I added it to the portfolio on February 5, 2013.
Yesterday, the Bank of Japan cut its forecasts for growth in the fiscal year ending in March 2016 to 1.7% from 2%. The bank reduced its inflation projection to 0.7% for the fiscal year from 0.8%.
The lower forecasts—and the rapid reductions in growth estimates for the quarter that ended in June from an earlier consensus at 1% annual growth—are a big setback for Abenomics, the effort by Prime Minister Shinzo Abe to revive growth and inflation by weakening the yen by massive purchases of government debt. The Greek debt crisis and the bear market in Chinese stocks set off a stampede into the yen as a safe haven from market turmoil. That move overwhelmed moves by the Bank of Japan, which, to be accurate, didn’t do much to fight the recent appreciation of the yen.
To the degree that the Greek debt crisis and the Chinese bear market move to the back burner, the rush into the yen will slow. And with Federal Reserve chair Janet Yellen holding fast to an increase in U.S. interest rates this year, I think the likelihood is that investors and traders will see a reversal in the yen strength sometime in the next few months.
That will put downward pressure for U.S. investors in any unhedged positions in Japanese assets. In the case of Toyota I’d rather sit that pressure out as the yen moves back toward 110 or lower as fears recede and a Fed move gets more likely.
There’s even a good chance that the strength in the yen will bite Toyota’s next earnings report, due on August 8. When Toyota released is fiscal year results in early May, the company forecast a yen at 115 to the dollar for the fiscal year that ends in March 2017. I think that’s a reasonable forecast for the entire year, but there’s certainly a good chance that the August 8 results will show a stronger yen or at least fears of a stronger yen.
I would be looking to see if I can rebuy Toyota on a decline in the yen to 110 or lower—assuming that auto sales don’t deteriorate further in the key North American and European markets.
Well, that didn’t take long.
Hours after the early Monday morning agreement on an agreement, the plan for a third Greek bailout program and bridge loan had started to come apart. The obstacles could sink the possibility of any deal—if the parties raising a ruckus aren’t willing to compromise.
Perhaps surprisingly given how harsh the agreement to agree is on Greece, the big problems aren’t coming from Athens. It looks like the Greek parliament is set to vote its approval of all the terms creditors demanded before they would sit down at the table to hammer out a bailout program. Prime Minister Alexis Tsipras could well lose a the support of enough of his own Syriza party to force him to form a new coalition government with opposition support, but polls show that 70% of Greeks want parliament to vote yes, and that 68% of voters want Tsipras to stay on as Prime Minister even after any changes to the coalition.
No, the problems are coming from outside Greece—and they’re coming from just about every direction.
A new sustainability report leaked this morning from the International Monetary Fund projecting that the proposal plan will continue to eat away at economic growth in Greece and that Greek debt will peak at 200% of GDP. The report raises the issue of the sustainability of the bailout program. That’s a crucial issue since the IMF is not allowed to extend financing if it doesn’t think it will get the money back. With the 16 billion euros of the 86 billion proposed bailout program projected to come from the IMF, a finding that Greece isn’t sustainable under this plan would blow a huge hole in the agreement to agree. A potential solution would be to provide enough debt relief for Greece that the country’s debt load becomes “sustainable.” That, of course, runs head on into objections from EuroZone governments that oppose any debt relief. Reprofiling—that is extending the term of Greek debt—instead of cutting the amount that Greece owes would require, the IMF projects, extending the maturity of Greek debt for 30 years. Another possible solution would be for some individual country to lend Greece the money it needs for a bridge? Any names spring to mind? (Send suggestions to Alexis Tsipras, Office of the Prime Minister, Athens, Greece.)
The agreement to agree envisions that a short-term bridge loan to let Greece pay the European Central Bank the 3.5 billion euros due on July 20 would come from the European Financial Stability Mechanism set by the European Union in the wake of the global financial crisis. The rules of the EFSM would seem to preclude using the money for EuroZone rescues. The United Kingdom, Denmark, and Sweden, members of the European Union but not of the EuroZone have already objected to this use of EFSM funds.
At least seven other parliaments need to approve the Monday agreement to agree, including Germany, Netherlands, Slovakia, Austria, and Finland. Despite the volume of protest against sending any more money to Greece in Germany, Chancellor Angela Merkel looks like she has the votes to win on the Bundestag on Friday. Finland, however, could throw a spanner in the works. The euro skeptic True Finns party, a member of the current coalition government in Helsinki, opposes extending any more bailout money to Greece and has threatened to bring down the government if it pushes ahead with the plan. Even though the True Finns saw enough success in April elections to increase the party’s clout in government (it’s leader Timo Soini is now foreign minister) I think the party will stop short of fulfilling its threats and there are, unfortunately time-consuming, ways of avoiding any EuroZone country being able to exercise a veto on the bridge loan or final program. The real danger here is that a Finnish “No” would bring out No votes in other EuroZone members such as Slovakia and the Baltic nations.
The problem, in my opinion, isn’t the ultimate approval of a third bailout program—that will eventually get worked out—although I doubt that this program will solve the Greek crisis. And it isn’t the ultimate approval of a bridge loan—that too will get worked out eventually. The issue, though, is whether or not the EuroZone can demonstrate enough near term progress to enable the European Central Bank to keep funding Greek banks and whether or not the EuroZone can work out a bridge loan before the July 20 deadline for Greece to make another payment to the ECB.