Saturday, October 8, 2016

TLH Weekly Review - 10/8/16

It was a busy week for sure with plenty of data and mischief afoot in the market.  It appears for sure the market is preparing for a rate hike. According to the CME Group participants are expecting 65% chances the Fed will raise rates in December.  And this time market internals are really displaying that probability.

For one Gold has taken it on the chin this week. The "yella" metal  dropped roughly 5% making it one of the worst weekly losses in years.

Gold fluctuates on a few things.
Confidence in Government, Inflation, Currency Fluctuations, Supply & Demand, & Interest Rates to name the big ones.

It's currency and interest rates that are taking center stage right now.  The Dollar Index has gone up in the last month from 94 to 97, and another rate hike is looking to be a real possibility. That's sending shorts back into Gold after they began leaving their 5 year long profitable trade back in January.

Now for some internals. Two of the most widely watched rate sensitive sectors, XLF and XLU, began showing markedly different trajectories. It started out slow in August, but it's really taking steam now as the performance gap between the two sectors is expanding. Here they are pitted against the S&P 500 since August.



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It's a full blown clobbering right now as Financials are up 8.10% and Utilities are down 8.61% in that time period!!!

Economic Data
 We received a lot of economic data this week too. I'd like to highlight the ISM Services Index that came in at 57.1 from a previous reading of 51.4. That's a solid number for one of the economies largest sectors. Also the ISM Manufacturing Index came in stronger at 51.5 from 49.4.

Unemployment data continues to come in pretty good.  It's not showing blockbuster job growth, 156k NFP this week, nor explosive losses with 249k for initial claims. I think that's part of the new normal as the economy continues it's transition to a new phase.

The Portfolio

It continues to be frustrating to say the least. Since the portfolio is heavy in rate sensitive tobacco names there clearly has been some struggling.  HCP has been under duress as it struggles under rate pressures.  The company did announce a new financing facility for Quality Care Properties(QCP). This is the entity that will own it's ManorCare facilities. The money is going to be used to buy the facilities from HCP for the spin-off. HCP announced the proceeds will be used to pay down debt and general corporate purposes. I always love that last one.

Also news from Cognizant last Friday was no help. The stock dropped on news of illegal payments under the US Foreign Corrupt Practices Act. The stock has recovered some of it's losses this week as it trekked back up to $51/share. I still don't think this will have a long term bad effect on the company. In fact I still think for anyone that was looking to get a position on the cheap that was the time, albeit with a tad more risk.  I'll continue to monitor the situation. 

We did receive earnings this week from Global Payments Network.  The company reported a strong increase in Revenues up 25% to $939 million, but EPS was down to $0.55/share. That came from higher operating costs from the Heartland acquisition. Adjusted earnings backing out those costs came in at $0.86.

The company booked $81.7 million in amortization of intangibles from the acquisition, and other merger related costs of $30.5 million.  That put a big dent in profits for the quarter. But the company provided nice adjusted operating EPS projections for the rest of the year to $3.45-$3.55. Here is what the management had to say.

"Our fiscal 2017 is off to a terrific start, with organic growth accelerating sequentially across our key markets in the first quarter," said Jeff Sloan, Chief Executive Officer. "Heartland continued its strong growth momentum in the United States. Our businesses in Europe performed exceptionally well, and our Asia business produced its highest rate of organic revenue growth in several quarters." Sloan concluded, "We also could not be more pleased with our Heartland integration efforts, which continue to track ahead of our expectations.

"As a result of our strong first quarter performance and progress with Heartland integration efforts, we are increasing our outlook for fiscal 2017 adjusted earnings per share to a range of $3.45 to $3.55, reflecting growth of 16% to 19% over fiscal 2016," stated Cameron Bready, Executive Vice President and Chief Financial Officer. "We also now expect adjusted operating margin for fiscal 2017 to expand by as much as 50 basis points. We continue to expect adjusted net revenue to range from $3.2 billion to $3.3 billion, or growth of 47% to 52% over fiscal 2016." 

That's all for now and have a great weekend!

The Long Haul Investor 

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