Thursday, June 30, 2016

McCormick Earnings

This morning McCormick Co(MKC) released their Q2 2016 results. The company reported EPS of $0.73 on revenues up 4% to $641 million. Acquisitions helped fuel a good chunk of the revenue increase, and the company saw a gross profit margin of 40.7% during the quarter. I like those numbers. So far today the shares have traded up to $106/share. Here is what CEO Lawrence E. Kurzius had to say.

"McCormick's second quarter results continued the strong performance we had in the first quarter of fiscal year 2016. Led by our consumer segment, we increased sales 4% and in constant currency, the increase was 6%. Underpinning our growth is the rise in consumer demand for healthy flavor and high quality products, and we are meeting this demand with an expanding portfolio of on-trend products. In the second quarter, we introduced a number of new products and were pleased to expand our portfolio with the acquisition of Gourmet Garden, a leader in chilled, convenient herbs.

"In addition to higher sales, we significantly increased second quarter gross profit margin. Led by our Comprehensive Continuous Improvement (CCI) program, we are improving productivity and lowering costs throughout the company. We are making great progress toward our four-year goal to achieve $400 million of cost savings by 2019, and have increased our cost savings goal for 2016 to a range of $100 million to $110 million. These cost savings are driving margin improvement and are our fuel for growth, providing the funds for higher brand marketing, product development and acquisitions."

On a side note today is the last day of the quarter. I'll be busy getting the portfolio performance calculated for the last three months so expect an update no later than Tuesday. What a wild time this year continues to be! I'm looking forward to the results, and I am really hoping to make it two quarters in a row that I beat the market. 

Monday, June 27, 2016

Brexit Recap

Sorry there was no weekly review this week despite all the big news out of Europe. This was apparently quite the shocker as Britain voted to leave.  I'm expecting the markets to be pretty wild for at least a couple weeks as players reset their books.

Now I have heard and read the referendum isn't 100% binding, and that this whole ordeal can take up to two years to completely pan out as all the processes are followed. Don't quote me on the accuracy of the information, but I wouldn't be surprised to see some type of political gimmicks to try and keep Britain in the EU.  Either way I feel the people of Britain will get what they want, and if that's to leave then so be it. I would not doubt an American would feel differently in this situation if trying to regain independence themselves. People want to be free and that can only be contained for so long.

It was interesting to note on Friday that German and France's market actually ended the day worse than Britain's. I know it was my personal opinion that there was no win-win situation here. Although long term this will be better for Britain if they leave, and bad for the EU. Also there was a large drop in European financials. This has been a risky sector all through the Great Recession and continues to be. With bank failures and bank bail-ins seemingly on the cusp every year I'd continue to stay from this area like a foul smelling skunk. 

I believe there will be some real opportunities in well run European companies, albeit with a lot more risk than normal as the next few years are starting to look a lot shakier.  One thing I noticed is it seems higher quality names and a flight to safety in bonds is definitely gaining even more momentum.  In other words the best blue chip stocks, their debt, and the best government debt are holding up relatively better than other assets.  That's expected when uncertainty is abound. 

Tuesday, June 21, 2016

European Shares Underperform

It hasn't been a secret how poor some European markets have been doing in relationship to their US counterparts lately. Here we have the IShares Europe ETF compared to the S&P 500 YTD.  So far the US index is up 4% compared to investors who have been long Europe's biggest corporations.

The performance gap during the last two years is even more impressive. Even though the S&P has experienced two pullbacks last year it is still beating their European counterparts by a wide margin.  

Interestingly our British counterparts are performing better overall YTD and the last two years. Time will tell how what kind of performance we will see after the vote Thursday. 

Saturday, June 18, 2016

TLH Weekly Review

Well what a week it was, and what a week this next one will be. With the Federal Reserve not raising rates this week(shocker), all eyes will be on the Brexit vote next week.

Janet Yellen and Co. decided this was not the month they would raise rates again.  Admittedly their talk has been all over the place this year.  Yet their actions have shown the propensity to do nothing. The Fed puts out a data sheet showing their projections for economic growth, unemployment, etc.  If you look closely you'll see the Fed really doesn't see much in  economic growth the next few years. 1-2% in the long run is paltry when you compare it to rates in many Asian countries where the economy is growing at 5% or more(including China).  Yet just back in December they were calling for 4 rate hikes in 2016 and 2017.

So what does that mean? Well it means the Fed is likely going to raise rates, just not at the pace everyone, the Fed included, thinks it originally will happen. They don't see a recession coming, and frankly I think we just barely missed one.  I think a lot of it is due to the problems we are seeing everywhere else.  A lot of foreign money is fleeing their homeland and ending up in the good ol' US of A. What does that money do?  Plenty of things from buying real estate, business', bonds, and of course sitting in the bank. My GUESS is the Fed is waiting to see what happens in Britain first before making any move. This is far more important than a rate hike by them. They also don't want to wait to close to the election.  Plenty of Fed members still see a rate hike coming this year so July is a real possibility.

Then we had retail sales come in this week with a .44% increase.  From the chart you can see there were quite a few bumpy months back in 2015, and January of this year.  That's definitely part of why the market has been so topsy-turvy. Yet this indicator has shown people are spending money. It just happens to be a little uneven at times. I bet from talks with family and neighbors you'll see they are out there buying, but they are more selective and price conscious. Things are just good enough, but not spectacular.

So lets get to the market.  Most people will say the Fed didn't raise rates and the market fell because of it. True to an extent. Rising rates do coincide with rising equity prices generally. But if we look at this chart we can see most of this weeks -1.1% came before the Fed announcement. After the announcement the market didn't even start to fall until the final hour of trading. At the end of the week the DJIA closed right near where it was trading before the non-rate hike.

Then we see gold has actually moved higher. That's contrary to gold bug fundamental beliefs the metal should be falling since inflation and rate hike expectations are very low. FYI the CPI numbers came in again at a very tame .2%.

 I do find Thursday's action a bit strange.  You can see the volatility right after the Fed announcement Wednesday. Thursday opened up big, only to see massive selling into the close.  The cynic in me thinks George Soros began selling his position. But you know he's long gold so everyone else should of course thank him for giving that generous tip free of charge and buy up all the shares he will then unload to you.  Yet gold has continued to hold onto it's gains. I'm not fully convinced the metal is out of the woods yet and about to resume an unabated long term march higher. I wouldn't be surprised if it tested lower support zones one more time before it retests higher resistance areas showing a true breakout to the upside.

IndexStarted WeekEnded WeekChange% ChangeYTD %
S&P 5002096.072071.22-24.85-1.21.3
Russell 20001163.931144.73-19.20-1.60.8

Now onto the portfolio. There really was not much news. Which is the way I like it despite owning a ton of big companies. I find it amazing that despite owning plenty of billion dollar companies, and tobacco, there media doesn't buzz much about these companies.  I'd say IBM get's talked about the most on mainstream media. 

I did add shares of Diageo last week. And I'm hoping to get a shot this week below $100.  I think with Brexit coming this week I'll get a shot in the ensuing chaos.  The same goes for a lot of other names I've been eyeing. Frankly a lot of stocks seem fully valued right now, and it's hard to add positions in great companies when everyone else is willing to pay full price. Remember we try to buy when the clearance posters come up. Now I'm probably not the best with that, but I try to make sure I buy when a stock has been unfairly beaten down. 


Tuesday, June 14, 2016

German Bunds Go Negative

For the first time in history the yield on German 10 Year Bund's has gone negative. A lot of this can be attributed to the upcoming Brexit Vote.  That's not the whole story though. Capital around the continent and world is fleeing for safety just in the hopes it preserves principal. And now in some cases even willing to take a slight loss. 

Monday, June 13, 2016

Gun Stocks Soar

While our thoughts and prayers go out to the families and victims in Orlando there is always a plus for someone else. 

Today shareholders of Smith & Wesson(SWHC), and Sturm Ruger(RGR) are trading to the upside. This is pretty normal after a tragedy such as this.  It's usually figured there will be a short term spike in sales as people fear stricter gun laws will be coming down the pipeline. At least that's what the media states overall.  

I had written about SWHC before regarding my previous ownership.  It's a well run company that's for sure.  However one could make a pretty decent living if they decided to trade the company if you could gauge sentiment and read the tech's correctly.

Saturday, June 11, 2016

The Long Haul Weekly Review

It's been a quiet couple of weeks around here.  Summer is starting so we must get out and enjoy it. Also there really hasn't been much going on with the market. It's been pretty calm up until the last few days.That's evidenced by a a VIX which hasn't seen a closing above 18 since March 10. Even with the 1% plummet Friday(as of writing) the VIX didn't even break above 16.50.  That's pretty tame. I don't however expect this to last. We have BREXIT coming up which is sure to induce some stomach churning volatility across the globe. BREXIT will be far more important than a FED rate hike. So hang on tight as the ramifications will be felt before and after as big money re-positions itself for the future.

Visit to see more great charts.

On top of that we still have potential rate hikes from the FOMC.  The market doesn't expect much from the FED the next two meetings. Especially June with odds around 2%.  I disagree with that assumption.  I think the market is underestimating the possibility here.  Mario Draghi just made a plea with other central banks and the EU to get going.   Also the FED doesn't want to wait to close to the elections out of fear it will look political.  That's my opinion at least.

Back to the EU. The ECB will now begin to actually buy corporate bonds so we shall see what affect this has.  Also Draghi basically pleaded with governments across the EU to get on fiscal reform now.  He has in the past mentioned this area, but after pulling out all the stops and not seeing the progress expected it's becoming now or never.  Without some help from fiscal reform it's becoming more apparent the ECB's cannon is coming up way short.

Despite the low volatility there has been quite a bit of action going on within the market.  So far this year Energy, Materials, and Industrials have been seeing strong gains compared to other sectors. Utilities still are doing well, but that could be attributed to the continued search for yield, and the amazing amount of volatility and flight to safety we saw at the beginning of the year. Either way Energy, Materials, and Industrials had lagged the market in the past few years.  It seems these cyclical sectors are finally starting to turn.  That might be a harbinger of things to come.  With the economy still showing growth we might be at the point where we can avoid a recession(albeit barely), and continue to see GDP gains.  We'll find out in late July with Q2 GDP exactly how the economy is faring.

Also government debt has really been gobbled up across the globe.  Yields in Germany, Switzerland, UK, and the USA are all near recent or all time lows. It's not surprising considering the how low central banks have kept rates, but investors have been willing to bid the debt to the point where yields are near 0% in a few instances. Switzerland for example is going to auction off 13 year 0% coupon bonds!

Ironically investing in long term US Treasuries would have netted you nearly 10%(via TLT) this year.  Even junk bonds(JNK) are joining the party again with a 5%+ gain this year so far. Not to shabby at all.  It just goes to show investors across the globe are willing to go anywhere to secure their capital.

That might be all fine and dandy in the short term.  But I'm not sure if the out performance of bonds will continue.  With the S&P 500 yielding around 2.1% and 10 year Treasuries at 1.62%, it's hard to believe someone would give up the upside of stocks and a yield that is likely to continue increasing.

IndexStarted WeekEnded WeekChange% ChangeYTD %
S&P 5002099.132096.07-3.06-0.12.6
Russell 20001163.361163.930.570.02.5

I did actually have a limit order hit for shares of DEO Friday. I think the volatility will allow me another chance to get shares at a decent price. This is one of the few alcohol companies I'm seeing value in right now and I want to continue building the position.  If I'm lucky maybe shares of BUD will fall below $115.  The companies merger with SAB Miller is pretty much approved so we that will finally be behind us. Both companies are trading at a better value the peers such as Constellation Brands and Brown Forman. Both of which I'd like to have if they were at better prices. 

It will be exciting to see how the portfolio performed during Q2.  Recent adds with Praxair, and IBB are looking like smart moves. IBB had a real good run, but has come back to earth quite a bit this week.  I'm still on the lookout to add to other positions. I really regret switching my limit order I had set for MO a few weeks back. The stock has since gone from $59 straight to $66.  That was a 10% gain we missed out on. Just life. 

That's about all for now. I'm happy with not a lot of portfolio news. It means our stocks are busy working hard day in and day out for us. Have a great weekend all!

Sunday, June 5, 2016

TLH Weekly Review

I'll keep this one short and sweet as we all try to enjoy the early days of summer. Which causes the weekly review to be a little late(which I apologize for), but you have to enjoy life when you can!  It was still a busy economic week despite only 4 days due to Memorial Day.

We started off with Personal Income and Spending. Income rose by 0.4% while spending rose 1.0%.  I'd personally like to see it the other way around.  ISM Index came in at 51.3 which still shows growth, and was up just a bit from the prior month. ISM Services also came in at 52.9.  Both readings are key to stay above the 50 level to show some growth.  Construction spending decreased -1.8% so it remains to be seen if this is a temporary decline as the previous reading showed 1.5% growth.

Then we got a big bummer on Friday. NFP came in at 38K, which means the economy only added that many jobs. That sent markets all over the place and people were questioning if a Fed rate hike is now off the table.  Interestingly the unemployment rate came down to 4.7%.  A big contributor to the decline was a reduction in the labor force participation rate which which decreased to 62.6% from 62.8%. Not exactly encouraging.  I still don't think this means a Fed rate hike is off the table. In fact I'm somewhat more inclined to think the Fed will raise rates another 25bps in June or July.  With both ISM's above 50, and the unemployment rate at 4.7%, I think that gives them enough room to really consider a hike.  The market heavily disagrees with me a June hike is in the cards as expectations fell from 30% to 6% on Friday.

The markets sold off initially on the NFP news, but were able to climb back most the day. Either way the S&P 500 ended the week barely changed, the Dow had a slight loss, the Nasdaq a slight gain, and the Russell came in with a nice 1.1% climb. Small caps had a real rough start to the year, but have seemed to gain a lot of traction lately.

Started Week
Ended Week
% Change
S&P 500
Russell 2000

Now for some stock housekeeping that I took some time away from last week.

Costco reported earnings at the end of May which helped propel the stock higher.  On the surface it appeared sales had flat lined. However when we look at the numbers under the hood the company saw sales increase 3% when adjusted for currency and gas deflation.  Even with revenue numbers under pressure from currency and gas deflation the company still reported a 6% increase in EPS to $1.24 according to the conference call.  Additionally they saw a small increase in gross margin from 11.09% to 11.43%. Also the renewal rates have been very strong for the company.  Even the online site saw a 14% increase from the year ago quarter.

All told it sounded like this traditional retailer continues to run a tight ship.  Plus it's working really well in the areas that are important with membership renewals, and strong online sales. That's something not a lot of retailers are putting together right now.  I think the stock has been under some pressure as investors wait to see how the tide turns with what appears to be an ever increasingly strong threat from Amazon.  But the company is operating better than many of its traditional retailers. Wal-Mart for example just noted in it's recent quarter that their online sales are not where they'd like to be with somewhere around 7% growth.  I think the company has the most unique traditional retailer platform, and while overall growth is slower than it was years ago, it's still strong.

Universal Corp also reported a strong quarter at the end of May.  The stock popped on the news and has since come back a bit. I'm not going to dig into specifics, but I did have one key takeaway from the conference call. 

They were asked if the new FDA regulations were going to have any impact on their liquid nicotine business.  Management responded that they didn't see any changes to their operations or outlook.  In essence the FDA granted a monopoly to all existing players.  That's a big win for the company as a major supplier of liquid nicotine to many companies. They will remain one of the few big players with products already approved by the FDA.  Startups will find a much harder time entering the field now.  I think this area is going to represent a nice growth opportunity as tobacco company's start what seems to be a bigger push into vaping.  I think that's the key for this slow and steady pick.  Regulated monopolies are great for business. It provides protection from competition, which ensures margins can stay at a higher level.