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Wall Street Strategies has been providing independent stock market research since 1991 to individual, retail and institutional clients through a balanced approach to investing and trading. Charles Payne, our founder and chief analyst, is routinely sought after for his stock market, political,... More
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  • The New Pharaohs By Charles Payne

    So Let It Be Written, So Let It Be Done.
    -Pharaoh
    The Ten Commandments

    This week, Bankrate.com published a poll on Main Street's appetite for investing (conducted by Princeton Survey Research Associates), which revealed 73% of adults are no more inclined to invest in the stock market right now, than in the past. I know there is a notion that there is this voracious Main Street appetite for stocks because major indices are at or near all-time highs, but that notion is completely off base. Ironically, the masters of the universe, who mostly "say" the market is going to crumble, continue to make piles of money ... in the stock market.

    However, it is a wonderful thing when you can talk up your book, and for a period of time are guaranteed success as individuals, while others follow your lead (and established position). The New Pharaohs are so powerful that they are going after the biggest companies and are dancing in the grey areas of the security rules and laws. Track records do not matter at this point, because these guys have the world in the palm of their hand:

    * Build a massive position in a company and then get another company to launch a takeover bid - whoa! That is a heck of a trick.

    * Go short a stock then get lawmakers to launch investigations, which taints that company and its underlying shares.

    * Bully, intimidate, campaign, and now collude, all done in plain sight. These guys do not want to be lumped in with the greenmail crowd that once shook down companies for quick scores. These days their prey or targets are laid-out with professional rationale (save the notion of shorting Chipotle Mexican Grill because of Taco Bell), and slideshow presentations. It is all on the up and up, and the only thing is that every stock not in their scopes is overbought, and ready to crash.

    Talk about an amazing feat - they do a nuts and bolts evaluation of their targets, along with all the other publicly traded stocks in the market, too.

    Alternative Agendas

    Moreover, I find many of these market masters to be serious limousine liberals that pump gobs of money into politics, make billions in the stock market, pay lower tax rates than I do, and still get a free pass in the press. Late yesterday, David Einhorn said that people should be afraid of what high-frequency trading is doing, and should only use IEX.com, mentioned in Michael Lewis' book. He also said that this is the second tech bubble in 15 years, even if there are fewer bubble names, and the enthusiasm is tepid compared to 2000.

    In the meantime, the interesting thing about crashes and panic is that a firm like IEX.com would see its revenues surge exponentially. Einhorn was good enough to admit that he does have an exchange in that venture. He did close out shorts on Chipotle CMG and Michael Kors KORS two retail operations, that he obviously never stepped inside of because one would not need an analysis to see the kind of energy and loyalty their customers have toward them. (Even great and hot businesses can have overvalued stocks, but in the last two years, it would have been a huge mistake betting against those two names.)

    Nevertheless, trying to play alongside the big boys with all their fancy tools and advantages has taken a toll on investors and would-be investors. The key for investors is not to "play" the market. In the end, great companies will have great share prices.

    Meanwhile, I am sad for young Americans who waste their youth stuffing their money under their mattresses, or in savings accounts, only to watch their money lose purchasing power every day.

    What could the GOP learn from Harley-Davidson?

    As republican strategists lick their chops over the prospects of snatching the Senate, many behind the scenes are naturally worried about the propensity of the party to snatch defeat from the jaws of victory. The upcoming midterm elections look like an even greater layup than did the Presidential election that brought back the incumbent with the worst economic performance and poorest polls in history. This is not a new phenomenon. In fact, this is something the GOP has perfected over the years: fumbling the ball, a couple yards from the end zone.

    It was about twenty years ago, when I was at a telecommunications event at the request of a company in which I was invested at the time. It was a big deal, held at the famous 21 Club in Manhattan; the keynote speaker was Representative Ed Markey of Massachusetts (now Senator). The central theme of his speech was discontent; he referenced the Million Man March becoming a multimillion men and women march of different races and religions.

    At the time, George Bush was riding high in the polls, so later that afternoon, as everyone was mingling, I asked Markey how the Democrats could beat him and the GOP. He replied with cheer and confidence, "they'll beat themselves." For couple of decades now, the party has mostly shot itself in the foot. Consequentially, the nation is in the midst of a tug-o-war that could derail our greatness, and relegate future generations to lives of limited achievement, as they pay off mountains of debt and fund the welfare utopia.

    No RINOs, No Pandering

    I get the idea that some republicans seem more like democrats, or are too concerned with holding onto their own political power rather than forging real change based on ideology. However, I am not sure that it is smart for republicans to go completely jihad on themselves ahead of major election cycles. Nevertheless, that is exactly what is going to happen, and I think a couple winnable seats will be lost in the aftermath. Then there is the narrative that luring non-GOP voters is akin to pandering - a four-letter word after Mitt Romney lost.

    Anyone in sales or investing in the stock market understands it is all a numbers game. Moreover, it is about being smart for the future, and not living for the moment. Stocks that beat earnings estimates and offer weak future guidance, more often than not, get smoked. It is actually better to post a subpar earnings result and promise better news in the future. This line of thinking seems lost on several GOP strategists. For them, it is about getting out the base, even as that base shrinks in the fast ever-changing demographics.
    That might work in the midterm election cycle this year, but what about the next presidential election, and the one after that, and so forth?

    Harley Big Tent

    Long before the broad market melted down in late 2008-early 2009, shares of Harley-Davidson HOG were in complete freefall. Peaking at $77.00 in November 2006, the stock crashed down to $10.00 by February 2009. Management got the message loud and clear and embarked on a plan to get more Americans to buy their product. The company focused on four groups:

    * 18- to 34-year-olds
    * Blacks
    * Hispanics
    * Women

    Harley made real marketing efforts, which resulted in real results. From 2008 to 2012, sales among those four segments of the population have outpaced the core 35-year-old white male by 100%. Now, Harley's street bike is number one for each group, sending market share up dramatically (see sidebar).

    If a product is great and people do not know that it is great, they need to be told or sold. Calling them dumb or low-information is actually dumb and lazy. In business, companies cannot afford to draw lines in the sand and dismiss potential customers, although more than a few have tried.

    The big question for America is how much longer it can endure policies and rhetoric which attack the very essence of our success. America cannot afford anymore-punitive actions that punish success, raid corporate balance sheets, and makes excuses for failure while rewarding mediocrity. The American story is amazing and needs to be told and re-told. Sure, it means a stronger push and long-term marketing to non-believers. According to the Harley Davidson's management, America will look a lot differently by 2050.

    * 200 million non-traditional Harley buyers
    * 50 million traditional Harley buyers

    Translate that into votes, and getting your base to the polls will not mean anything.

    The Market

    Equity futures have edged higher this morning as the earnings parade rolls on. I haven't seen a single miss on the bottom-line and fewer top-line misses than in preceding quarters (Sketchers posted the most amazing report, and I will feature them in a piece tomorrow on reinvention and redemption). By the same token, most of the large names have beaten the street by small amounts over consensus.

    Dow Jones Earnings

    How to Read an Income Statement Part I

    Dow Chemical

    Highlights

    Most times I see companies began their earnings release with the earnings per share number, they beat the Street estimate and then feel some kind of redemption. Dow Chemical has been under fire from an activist shareholder (yes, one of the "Pharaohs" of Wall Street) so they start out by showing the world that they beat consensus estimates by $0.08 (they know that anyone reading this knows the estimate).

    Plastics had pricing power.

    Coatings "outpaced" the market - another way of saying that they took market share.

    Sales were strong in a difficult market: China

    Our shareholders are getting paid big time to hold our stock and keep in current management…so stuff it, activist investors.

    First Quarter 2014 Highlights

    • The Company reported earnings of $0.79 per share. This compares with earnings of $0.46 per share in the same quarter last year, or adjusted
      earnings(1) of $0.69 per share - a 14 percent increase versus the year-ago period.
    • Sales were $14.5 billion, up 1 percent versus the same quarter last year. Performance Plastics drove sales gains, up 6 percent on an adjusted basis(2)due to higher prices. Higher volumes in Coatings and Infrastructure Solutions outpaced the market, resulting in a 5 percent increase in sales for the segment.
    • Emerging geographies grew sales 3 percent on an adjusted basis, led by volume growth in Greater China (up 7 percent). Price gains in North America were offset by volume declines, reflecting weather- and transportation-related impacts in the quarter. Sales in Western Europe increased slightly due to volume growth of 2 percent.
    • EBITDA(3) was $2.4 billion, compared with $2.2 billion or $2.3 billion on an adjusted basis(4) in the year-ago period. Increases were reported in most operating segments, led by gains in Performance Plastics, Agricultural Sciences, and Coatings and Infrastructure Solutions.
    • Adjusted EBITDA margin(5) expanded more than 60 basis points to 16.6 percent on a year-over-year basis, with increases reported in all operating segments except Feedstocks and Energy. Margins expanded despite a more than $300 million increase in purchased feedstocks and energy, due to continued emphasis on productivity and cost-control actions.
    • Cash flow from operations increased nearly 30 percent versus the year-ago period, reflecting the Company's productivity actions to increase working capital efficiency and to reduce costs.
    • Dow continued to drive shareholder remuneration actions, returning $1.7 billion to shareholders in the quarter through declared dividends and share repurchases.

     

    Tags: HOG, CMG, KORS
    Apr 23 10:23 AM | Link | Comment!
  • LOVE AND SOLITUDE - By Charles Payne

    A stranger entered a cafe in Milan and puzzled its occupants by saying:
    "I'm neither a foreigner nor Milanese."
    "Then what are you?" they asked.
    "I am an Italian,'" he explained.

    Gian Rinaldo Carli
    Della Patria Degli Italiani

    It took another one hundred years before this nationalistic tone resulted in Risorgimento, or the Kingdom of Italy, which was completed in 1871. These days, nationalism is a four-letter word, and patriotism is being tested by policies that turn the concept of fairness on its ear.

    The western world is being torn apart by (past) success and complacency, which is a deadly combination that has resulted in welfare societies being unable to denote the difference between tough love and real love.

    Moreover, the argument is further complicated in America where any talk of asking fellow citizens to use their wit and determination to change their lot in life is greeted with cries of racism. Nonetheless, there is a movement gaining momentum in which the makers are essentially saying "enough," we just want our own thing.

    For the most part, most nations have been cobbled together throughout the years, formed in the aftermath of war. While lines on maps can be erased or redrawn, and language and costumes can be stifled, the burning desire that dwells within a people for the love of their roots cannot be extinguished. Still, such passion can be expressed along with a greater love of country, when things are good, or when the entire nation has a singular purpose. Unfortunately, this is not the case anymore.

    Big problems are not about slight differences in political opinion.

    Veneto has five million people, and it is one of the richest regions of Italy. Recently, an online vote revealed 89% of residents want to break away and form an independent nation. These rumblings have existed in Northern Italy for a number of years, creating political tension that some see as a powder keg. Hardworking and industrious regions including Lombardy, Piedmont, Tuscany, and Emilia-Romagna are all worked up over the confiscation of their sweat to placate the non-working south.

    Last year, the residents of Veneto paid out €30.0 billion more in taxes to Rome than it received in benefits.

    Catalonia has made the most noise as of late on the topic of separating to form its own nation. Absorbed into Spain and beaten into submission by France, the region had to suppress its culture and language (and only in 1979, has the dual language with Spanish become official). Catalonia has overcome such treatment to become an economic juggernaut in a nation with 20% of adults under age 30, who have never held a job. Now, the residents of Catalonia send €17.0 billion more in tax payments to Madrid than they get in return as benefits.

    Flanders was the runt of Belgium, but it has been forged into a vibrant economy, while its French-speaking neighbors seek to suck up more and more welfare payments and government jobs each year. I have long suspected that a successful independence movement here is possible, and it could still happen, as Dutch-speaking people demand autonomy, and a celebration of their language and culture. Then there is the money rub. According to reports, transfer payments from Flanders to Wallonia in 2007 amounted to €5.7 billion, and when taking into account debt and interest payments, this amounted to €11.3 billion.

    Bavaria is the second most populace region of Germany, and an economic powerhouse. With 12 million people, it would have a population larger than 20 members of the European Union. Its €440.0 billion GDP would be the envy of most of Europe as well. Religion (Catholic) and dialect also separate the region from the rest of the country.

    There are several other independence movements at various stages throughout Europe, including Madeira in Portugal and Scania in Sweden, where proponents of independence continue to fret over its 1658 takeover. The movement and vote in Scotland could be monumental in how other attempts for independence in Europe fare, in which I plan to write about at a different time as I get a better handle on the lay of the land. However, there are enough examples of burgeoning movements, where hard working people are tired of being ripped-off by their government.

    Of course, the powers that pull the strings are worried sick over the possibility of a wave of successions in Western Europe, just as Russia is reclaiming former regions. Even though most would-be breakaway regions have hinted at staying in the EU, these industrious people understand the immense trade-off that comes with joining a common currency, a common legal structure, and common taxes, which might negate all they would have worked for, especially on the tax front.

    Looking for Love

    I was lookin' for love in all the wrong places
    Lookin' for love in too many faces
    Searchin' their eyes, lookin' for traces
    Of what I'm dreamin' of- Johnny Lee

    If Gian Rinaldo Carli's work applied to America today, it would go something like this:

    A stranger enters an internet cafe in New York City and puzzles its occupants by saying:
    "I'm neither well-rested nor evil."
    "Then what are you?" the patrons will ask.
    "I'm a hardworking success, looking for love and appreciation in the land of opportunity."

    While there are succession efforts in America, the fact is we are so intertwined with each other, and it is impossible to get wide swathes of like-minded people to push the issue. Instead, we have to rely on economic reality finally hitting home with those that have bought into the idea that a punitive tax policy is smart when it is designed to punish one group, while making it even more difficult for the other group(s) to improve their own lives. Moreover, I am rooting for hardworking people around the world to fight back governments that mistakenly think it is fair to confiscate their wealth, while dismissing their sacrifice in an effort to promote anger and retain power. Maybe some are looking for love in all the wrong places, and maybe some do not have a choice.

    The Market

    Equity futures are edging higher on a mix of earnings results and acquisition activity. Last night, Netflix posted an impressive earnings result with strong momentum internationally, and announced a price hike. Management offered strong guidance for the current quarter as well. Watch the stock closely as the shorts are pissed, offering a lot of backhanded compliments overnight, and this morning, and stand ready to pounce if the stock stalls as this is their only chance to avoided getting crushed.

    The following is a list of Dow stocks that reported this morning:

    Tags: MCD, TRV, UTX
    Apr 22 10:42 AM | Link | Comment!
  • THE CALM BEFORE THE EARNINGS STORM - By Charles Payne

    Once again it feels like another shake-out, with the smart guys buying stocks on weakness. There is a fair amount of legitimate anxiety ahead of a large slate of earnings releases this week, although it seems big misses would have already been pre-announced. Nevertheless, each earnings season has its fair share of bombs held until reporting day.

    If this newfound upward bias holds, we could see a strong finish to the session and that would say a lot about the risk-reward of the market.

    Obviously, companies that miss will see their underlying shares hammered, but with lots of bad news baked-in lately (particularly with the high-flyers), beats could be greeted with gargantuan upside with gap openings.

    One thing is for sure: this week has a big chance at setting the tone until the next jobs report.

    In the meantime, the NASDAQ is meandering in between its 50- and 200-day moving averages, which signals uncertainty. The good sign from a technical point of view is that the index is bouncing off a double bottom, last hitting 4,000 on February 3, then turning around to rally to a fresh new high.

    On the upside, a close above 4,200 could spark a monster move higher. Conversely, the inability to hold 4,000 means there is little support for two hundred points.

    Let us hear your thoughts on this week's survey. Click here

    Apr 21 2:37 PM | Link | Comment!
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