Out of WACC

Technical Analysis: EUR/USD and S&P 500

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This post will focus solely on technical analysis of currencies and indices.

EUR/USD (Bearish)

As you can see on the “Daily” chart, Symmetrical Triangle or contracting wedge (both very similar) has been formed. The trading range is contracting, not far away from breakout. You see the small yellow circle (around 1.1020) that EUR/USD is approaching? That’s where I would short EUR/USD. That’s the place where there are trend resistances, and Simple Moving Average (SMA) of 50 and 100 are approaching. Not only that, but Stochastic indicator should get close to 80 (overbought), as EUR/USD goes to that yellow circle. Let’s take a look at 4H (4-Hour) chart.

EUR/USD - 4H (4 Hour) Chart — EUR/USD – 4H (4 Hour) Chart

The first yellow circle you see on the “4H” chart was a sell single because support-turned-resistance at a rising trend line. Same thing is happening right now to EUR/USD, as it approaches the second yellow circle (around 1.1020).

The reason I’m shorting it in the tightening consolidation before the breakout is because there are many technical reasons to short it. Even if it goes opposite direction, my loss will be very limited (Just above the trend – around 1.1030)

Let’s take a look at 1H (1-Hour) chart.

EUR/USD - 1H (1 Hourly) Chart — EUR/USD – 1H (1 Hour) Chart

On 1H chart, I added Fibonacci Retracements indicator. Fibonacci Retracements basically act as support and resistance lines. The red lines you see on “1H” chart, are resistance lines. 61.8% level (or 0.618%) at 1.1012 is known as “golden ratio”. In my past expensive, 61.8% level has worked well. Plus, 61.8% level connects with the two trend lines in the yellow circle.

I would short EUR/USD as it approaches the middle of the second yellow circle (around 1.1015). Stop loss: 1.1030 (just above the trends lines and golden ratio (0.618%) level. Target: 1.0890 (just above the support trend as seen in the charts above). My target level (1.890) will change as time goes on, to stay in-line with the support trend.

S&P 500 (Bullish)

Let’s take at look “Weekly” chart, going back as far as 2008.

As you can in the “Weekly” chart, ever since hitting bottom in early 2009, S&P 500 have been in a uptrend. If you look at the white-line, there’s a long channel (you can call it a trend if you want). Current price is just above the 50 SMA (Simple Moving Average). Plus, it’s much closer to the support line of the channel.

Let’s take a look at two “Daily” charts.

If you look at any of the two “Daily” charts, you can see that the current price is sitting on 200 SMA and on recent-uptrend support (yellow dotted line). Even though it’s a strong signal to go long, I would not. The reason is that it is a 3rd time in over a month that the price is sitting on 200 SMA and uptrend support (yellow dotted line) , and the recent highs in the uptrend range were unable to reach the trend resistance as well break the previous high. It shows that the bulls are losing control and bears are slowly gaining momentum.

Where I would go long is at the circle shown with yellow arrow (around 2042). It’s just above the strong channel (or a trend) support line (Bold-white line) as shown in all three S&P 500 charts above. My stop loss would be just below the bold-white line. My target would be at the resistance level of 2134.

If you have any questions, feel free to leave your questions in the comments section, and/or contact me. Thank you.

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U.S. Rate-Hike Impending – Tick Tock

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Last Thursday (July 30, 2015), the Bureau of Economic Analysis (BEA) released its advance (1st estimate out of 3) of Gross Domestic Product (GDP) for the second quarter (April, May and June) of the year. It was positive enough to increase the chance of rate-hike in September significantly.

Before we go any further, let’s review what two types of GDP, nominal-dollar terms and real-dollar terms. Current (or nominal-dollar) GDP tallis the value of all goods and services produced in the U.S. using present prices. On the other hand, Real (or chained-dollar) GDP counts only the value of what was physically produced. To clarify the point, suppose a hat-making factory announces that it made $1 million selling hats this year, 11% more than last year. The $1 million represents nominal company sales (or current dollar). However, something is missing. From this future alone, it’s unclear how the factory achieved the extra income. Did it actually sell 11% more hats? Or did it sell the same number of hats as the year before but simply raised prices by 11%? If the factory made more money because it increased the price tag by 11%, then in real (constant-dollar) terms, the true volume of hats sold this year was no greater than last year, at $900,000.

It’s vital to know if the economy grew because the quantity of products sold was greater or whether it was largely the result of price hikes, or inflation. (Source: “The Secrets of Economic Indicators” by Bernard Baumohl)

Real GDP increased at a annualized rate of 2.3%, vs expectations of 2.5%. This is a major acceleration from the first quarter when real GDP increased 0.6% (expansion), revised from -0.2% (contraction). The economy bounced back after a slow start in the beginning of the year.

Real GDP - Quarterly (1Q 2011-2Q 2015) — Real GDP – Quarterly (1Q 2011-2Q 2015)

In the beginning of the year, US economy was hurt, or “walked backwards” due to unfavorable weather, lower energy prices, West Port strike, and stronger dollar. While, the economy has moved beyond the weather and west port strike, – a strong dollar, and lower energy prices will continue to limit growth.

While first quarter was revised upwards, 2011-2014 was revised lower. The economy grew 1.6% in 2011, down from the 2.3% initial reading; 2.2% in 2012, up from the 1.5% initial reading; 1.5% in 2013, down from 1.7%; and 2.4% in 2014, down from 2.7%. From 2011 to 2014, growth was essentially weaker. The economy expanded by an average annual rate of 2%, below initial reading of 2.3%.

Real GDP - Annual (2011-2014) — Real GDP – Annual (2011-2014)

Growth in the second quarter was boosted by consumer spending. Consumer spending grew at a 2.9% rate from a 1.8% in the first quarter. That is a very good sign because real personal consumption expenditures (PFE) AKA consumer spending, accounts for 70% of total GDP. If people are not spending, it spells serious trouble for the economy.

Real exports increased 5.3% in the second quarter, compared to 6% fall in the first quarter. First quarter’s significant drop was due to west port slowdown. The strong dollar has hurt exports but its effects have eased recently…for now. Port delays in the first quarter freed up exports and temporarily increased exports.

Business investment fell 0.6% in the second quarter, from previous 1.6% increase in the first quarter, as energy companies continue to scale back projects amid low oil prices.

Recently, crude oil prices have fallen back to the Earth. On Monday, August 3, crude oil prices hit just above $45 (currently below $45). It will continue to hurt energy companies, causing them to scale back projects and lay-offs. Low gasoline prices, however, would lead consumers to spend money. It’s better to pay off debts first before spending money on “wants”.

Crude Oil ("/CL" on thinkorswim) - Daily — Crude Oil (“/CL” on thinkorswim) – Daily

On Friday (July 31, 2015), Employment Cost Index (ECI) report for the second quarter was released and it was disappointing.

ECI, a broad measure of workers’ wages and benefits, increased 0.2%, smallest gain since records began in the second quarter of 1982, following 0.7% increase in the first quarter. Wages and salaries, which accounts of 70% of compensation costs, also increased 0.2% in the second quarter, the smallest gain on record.

Employment Cost Index (ECI) - Bloomberg Terminal — Employment Cost Index (ECI) – Bloomberg Terminal

The report suggests that slack remains in the labor market. The unemployment rate fell to 5.3% in June – the lowest level since April 2008 – close to the Fed’s target of 5% to 5.2%, which the Fed policy makers consider consistent full employment.

S&P 500’s reaction to both GDP and ECI reports.

S&P 500 ("SPX" on thinkorswim) - Hourly — S&P 500 (“SPX” on thinkorswim) – Hourly

Dollar’s reaction to both GDP and ECI reports.

US Dollar ("/DX" on thinkorswim) - Hourly — US Dollar (“/DX” on thinkorswim) – Hourly

The Federal Reserve are counting on rising wages to boost both the economy and inflation (2% target). On Wednesday, July 29, the Fed said it won’t start lifting rates until there is “some further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term.”

The Fed is monitoring employment, inflation, and wages closely as it moves to closer to raising interest rates from near zero, for the first time since the recession. Raising rates too soon or too late can have its consequences.

The Fed will meet on September 16 and 17. I still believe the Fed will raise rates. If employment, inflation and wage reports are not very strong until September meeting, the Fed might raise the rates by little as 0.10% (10 basis points), instead of 0.25%.

I believe the disappointment of ECI is temporary as more companies are starting to increases wages and more people are slowly entering jobs market. I also believe that GDP continues to be strong. In fact, I believe current Q2 GDP will be revised higher. Preliminary (2nd estimate) of Q2 GDP will be released on Thursday, August 27.

On Friday (August 7), important reading data of US economy will be released, non-farm payrolls AKA jobs report. My guess for employment and unemployment rate is 285K and 5.4%, respectively. I believe wages will stay flat at this time and accelerate in the next few months.

I will take advantage of any pullback in the greenback (US Dollar). Greenback has a room to strengthen more. Currency pairs such as USD/JPY, USD/CAD, I would be long, and I would be short EUR/USD. If you have any questions, feel free to contact me and/or leave comments below. Thank you.

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Canada Crisis: Second Rate-Cut Of The Year

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On July 15 (Wednesday), Canada’s central bank AKA Bank of Canada (BoC) cut overnight rate by 25 basis points (bps) from 0.75% to 50%. This is the second rate-cut this year. First rate-cut took place in January. Not only rate-cut, but lower growth forecasts.

BoC expects Gross Domestic Product growth to be 1.1% year-over-year (Y/Y) this year, down from its 1.9% forecast in April. Policy makers said that Gross domestic product probably “contracted modestly” in the first half. However, they did not call it recession. ‘‘The lower outlook for Canadian growth has increased the downside risks to inflation,’’ policy makers said.

Bank also reduced the net exports contribution to GDP by 0.8% to 0.6% from 1.4%. A stronger U.S. economy and a weaker Canadian dollar should contribute to higher export growth.

Bank of Canada's July Forecasts. Source. — Bank of Canada’s July Forecasts (Page 14). Source.

There has been a big shift in the inflation tone over the past few months:

April: “Risks to the outlook for inflation are now roughly balanced”

May: “the Bank’s assessment of risks to the inflation profile has not materially changed”

This time (July): “The lower outlook for Canadian growth has increased the downside risks to inflation”

“The Bank anticipates that the economy will return to full capacity and inflation to 2 per cent on a sustained basis in the first half of 2017.” In the April’s forecasts, the bank expected the economy to return to full capacity at the end of 2016. I can tell that the Bank is running scared.

Damages from low oil prices has been extensive. Canada is the world’s fifth-largest oil producer and lower oil prices will definitely not help the economy. The damages from lower oil prices shrank the economy in the first half of the year.

Recently after Iran deal has been reached, oil prices fell sharply. It’s currently trading around $48. If the the deal is finalized, it won’t be very good for Canada economy since Iran might want to double its oil production, leading to much lower oil prices.

The bank also said “Additional monetary stimulus is required at this time to help return the economy to full capacity and inflation sustainably to target.” If conditions get worse, they will cut rates again.

Oil is not the only problem for Canada. Other concerns are potential bubbles in housing and consumer debt.

According to BoC’s Monetary Policy Report (June), “the vulnerability associated with household indebtedness remains important and is expected to edge higher in the near term in response to the ongoing negative impact on incomes from the sharp decline in oil prices and a projected increase in the level of household debt.” (Page 30).

Over the past few years, housing prices in Canada have skyrocketed. Lower borrowing costs will just add fuel to the fire (DEBT + HIGH PRICES IN HOUSING MARKET WITH LOW INTEREST RATES = NOT A GOOD COMBINATION) . There just might be a bubble in the housing market. But, BoC does not think so.

The next BoC meeting is on September 9th, about a week before the U.S. Federal Reserve meeting, the day that many believe lift-off from the zero interest rate policy will take place. CPI and non-farm payrolls data for July and August will decide whatever the Fed will hike or not.

Rate-cuts and plunging commodity prices, especially crude oil, has caused sell-off in Loonie. Ever since the first rate-cut of the year (January), Loonie (CAD) has weakened significantly. With strengthening dollar (USD), USD/CAD has skyrocketed. When looked at monthly chart, USD/CAD has developed ‘Cup and Handle’ formation. While this is a sign to short USD/CAD, I would be very careful because fundamentals for CAD are too weak. If I were to short it, I would put my stop above the resistance line (Bold Red line).

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Liar’s Poker Player, Greece, Loses: Falling Further Through The Wreckage In Greece

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Greece had a close call to exit from the 19-member euro-zone (Grexit) following months of uncertainty. Alex Tsipras and Yanis Varoufakis were playing creditors for fools and bluffed too much. Now, they have lost “Liar’s Poker”.

Two weeks ago, more than 61% of Greeks rejected a deal in a referendum that included pensions overhauls and sales taxes. Then on Monday morning, Greece finance minister, Yanis Varoufakis, resigned after Eurogroup participants called for his resign because his absence from its meetings. Before the vote, he said he would resign if Greeks voted “Yes”. He is replaced by Euclid Tsakalotos, who has been involved in talks with European and International Monetary Fund (IMF) creditors.

Then, Euro leaders said that July 12 (Sunday) would be “deal or no deal”. Several days before July 12, Greece Prime Minister Alex Tsipras provided the same type of deal that Greek people voted “No” for, but with little bit tougher austerity. He broke his promise to Greek people.

Over the weekend (July 11-July 12), Euro leaders clashed over the deal. On July 13 morning (Monday), deal was reached. Euro-zone leaders agreed to give Greece three-year bailout up to EUR 86 billion ($93 billion) of aid which Tsipras accepted. This time, he absolutely broke his promise to Greek people.

The deal is much tougher and harsh, for Greece and its people, than the deals in the past few weeks. The deal also includes 30-year, euro-50-billion state privatisation programme. Half of the fund will be used to recapitalise Greek banks, while the remainder will used for debt servicing and other economic needs.

On late July 15 (Wednesday), the Greek parliament approved the deal. In 300-seat chamber, 229 voted to approve the deal and 64 were against it. There was 6 abstentions and 1 absent.

On the morning of July 16 (Thursday), after leaving rates unchanged, European Central Bank (ECB) President, Mario Draghi stated in the press conference that Emergency Liquidity Assistance (ELA) would be increased by 900 million euros ($979 million) over a week. There were reports that Greece asked for $1.5 billion ELA assistance.

On the same day, the Eurogroup finance ministers agreed to the launch of bailout talks and approved 7.2 billion euros ($7.6 billion) in bridge loans for three months. It will allow the Greek government to pay off upcoming payments. On July 20 (Monday), Greece is due to pay 3.5 billion euros ($3.8 billion) to ECB. Greece also has to pay about 2 billion euros ($2.2 billion) of arrears to the IMF. This bridge loan will “buy” time until the bailout is finalized.

Greek banks are scheduled to open on July 20 (Monday) after a 3-week closure. However, capital controls, or restrictions on cash withdrawals will remain in place. Daily cash withdrawal is limited at 60 euros.

Despite more aid being given to Greece, the country’s debt level is still a major problem. The country has about EUR 320 billion debt ($345 billion), close to 200% of Gross Domestic Product (GDP).

There are many calls for a debt haircut (not what you’re thinking). Debt haircut is reducing the amount of money owned. For example, if someone owns about $10,000, but cannot pay it all. Creditor can try to accept to get paid a fraction of $10,000, say $4,000. After all something is better than nothing.

Some people including Christine Lagarde, managing director of IMF, disagreed on debt haircut. She said debt relief was needed. Extension of Greek debt maturities, extension of grade periods, and reduction of interest rates would be enough, she said.

Even though the deal gets finalized or not, Greece loses. With the deal, life gets harder. Without the deal and exit from euro-zone, life gets much harder.

I learned one important lesson over the past few months. Anything can change anytime. Greece’s current deal might fall through any moment. So much uncertainty has caused EUR (Euro) currency to move around in different directions.

Ever since the deal was announced, EUR/USD has been falling.

I have been short on Euro for some time now and I will continue to be short. Even with deal close, tough challenges remain ahead. ECB might increase or even extend its Quantitative Easing (QE) program, giving support to the European stocks and causing Euro to weaken further. I believe EUR/USD will reach parity level in the next 6 months.

Once the Greece drama settles, more focus will be on the fundamentals in the euro-zone outside of Greece, which accounts for more than 98% of the region’s GDP.

No clear road ahead, still. What’s next?

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Cisco Systems Inc. (NASDAQ: CSCO) Undervalued – Part 2

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Part 1 can be accessed by clicking here or https://www.outofwacc.com/cisco-systems-inc-nasdaq-csco-undervalued-part-1/

Before I go any further, let me tell you what led to Cisco in the first place. I strongly believe in technology and Internet of Things (loT). I believe the market will increase significantly as there are unlimited demand for it and will continue to have unlimited demand.

(Part 1)

Continued:

Cisco’s gross margin, operating income, operating cash flow, and total cash are strong and of course impressive.

As of April 25, 2015, Cisco had almost $54.5 billion cash on hand. If you look at the “Total cash” chart below (Cash as of April 2015 not shown), you will see that Cisco had slightly over $52 billion cash as of July 2014. In a year, they managed to increase their cash about 5%. Over the last five years (2010-07 to 2015-04), they managed to increase their total cash amount by 36.25%. For company that’s so large and has a market capitalization of $136.9 billion, total cash appreciation is pretty impressive.

Cisco's Total Cash – Annually — Cisco’s Total Cash – Annually

As of April 25, they had current assets of $69.4 and total assets of $106.2 billion. They have total liabilities of $47.4 billion. With strong amount of cash and assets, liabilities are not an issue and should not be in the future as the company continues to trim down liabilities.

Gross Margin is very strong, although it has declined 3.7% in the last five years (see chart below)

Gross Margin % - Annual (2005 to Present) — Gross Margin % – Annual (2005 to Present)

Over the 10 years, operating income has increased significantly while both operating cash flow and working capital has doubled. It shows that Cisco cares about longer-term success instead of focusing on short-term maximization. Long-term investors will benefit from the minds of the management.

Operating $$$ and Working Capital - Annual (2015 - Present) — Operating $$$ and Working Capital – Annual (2005 – Present)

Comparable Company Analysis:

Below, you see a Comparable Company Analysis chart. I chose one major peer, Qualcomm. The reason I only chose Qualcomm is because all other peers such as Juniper Networks and Palo Alto Networks are too small.

Company Comparable Analysis – One Major Peer

Dividends and Stock Repurchase Program:

During the 3rd quarter of fiscal 2015, Cisco paid a dividend of $0.21 per share, or $1.1 billion. As of today, the divided is still the same. However, it’s expected to increase in the future. They pay a dividend of $0.84 annually, or 3% yield.

CSCO Dividend - 2011 to 2015 — CSCO Dividend – 2011 to 2015

In the same quarter, Cisco repurchased approximately 35 million shares of common stock under the stock repurchase program for an aggregate purchase price of $1.0 billion. The remaining authorized amount for stock repurchases under the program is approximately $5.3 billion with no termination date. I believe they will issue new share buyback program after the current program ends, probably in about five quarters if they keep spending approximately $1.0 billion each quarter.

I love that Cisco is aggressively buying back stock. Not only that, but they pay divided to their shareholders which I expect to increase in the future.

Conclusion: From my analysis on Cisco, I have my stock price targets.

By 3rd quarter of fiscal 2016: Net income from 3Q fiscal 2014 to 3Q fiscal 2015 grew 11.74%. Let’s assume, it grows 5% from 3Q fiscal 2015 to 3Q fiscal 2016, net income would be $2,558.85 (in $billions), or GAAP EPS of $0.50 ($0.4971 to be exact). It would be $0.03 EPS increase year-over-year. When Cisco buys back shares, EPS will be higher depending on the amounts of shares purchased back.

Now, let’s assume GAAP EPS for the next 3 quarters stayed the same as 3Q fiscal 2015 which is at $0.47. After the 3Q fiscal 2016, Cisco would have EPS (TTM) of $1.91. At the current share price, the P/E ratio would then be 14.82x. But at this rate of growth, $CSCO would be worth $32, 13% higher than current price ($28.32), at P/E ratio of 16.75x, just 2.82% higher than the current P/E ratio of 16.29x.

My target price might change when Cisco reports 4Q fiscal 2015 earnings on August 12, 2015. I expect better than expected results. US Dollar (greenback) strength might hurt foreign sales. About 40% of their sales are aboard.

Disclosure: I’m currently long on the stock, CSCO. I went long last year at price just below $25. I will continue to be long.

Note: All information I used here such as revenue, gross margin, etc are found from Cisco’s official investor relations site, Bloomberg terminal and morningstar. The pictures you see here are my own.

Disclaimer: The posts are not a recommendation to buy or sell any stocks, currencies, etc mentioned. They are solely my personal opinions. Every investor/trader must do his/her own due diligence before making any investment/trading decision.

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Disappointing Jobs Report – Bye Bye July Rate-Hike

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Last Thursday (July 2, 2015), non-farm payrolls report for June for disappointing. 223,000 jobs were added in June, vs expectations of 231,000, compared with an average monthly gain of 250,000 over the last 12 months. Although payrolls grew slightly, the unemployment rate ticked lower to 5.3% from 5.5%. While this may sound to be a good thing, it is not.

Unemployment rate fell due largely to a sharp decline in labor force participation, which fell by 0.3% point to 62.6%, the lowest level since October 1977. Decline in labor force participation shows more people were discouraged by the poor employment prospects that he/she is not actively seeking employments. Therefore, they are not reflected in the unemployment rate. Bottom line: they lost confidence in the jobs markets.

Revisions to the previous months’ job totals has been negative. April fell from 221,000 to 187,000 (-34,000) and May fell from 280,000 to 254,000 (-26,000), bringing losses of 60,000.

Total Non-Farm Payrolls – Monthly Net Change – 2014-Present

Job gains/loss:

Professional/Business services: +64,000. I believe it was largely due to college students who recently graduated or got a job while in school.

Health care: +40,000. ObamaCare continues to boost earnings for health care industry. Recently, health care stocks have been hitting all-time highs.

Retail: +33,000. Well it is summer, isn’t? It’s no wonder more jobs were added in retail.

Restaurants/Bars/etc: +30,000. One word, Summer.

Mining: -4,000. Oil decline has been hitting energy industry hard. Total decline in the industry now stands at 70,000.

While employment numbers are important to the Fed to justify the time to begin normalizing policy, I believe wage growth and Consumer Price Index (CPI) are more important. July rate-hike is off the table largely because wages remained flat. Average hourly earnings in the private sector stood at $24.95, unchanged from May and up 2% from a year earlier.

Average Hourly Earnings - 2014 to Present — Average Hourly Earnings – 2014 to Present

On July 17, CPI report for June will be released at 8:30 AM EST. It will be very important to watch for it. Any spending reports such as Retail Sales will also be important to watch out for because consumer spending makes up 70% of all economic activity. Retail sales account for one-third of it.

I strongly believe September rate liftoff is possible. If future CPI, average hourly earnings, and employment fall in any way, chance of liftoff in September will be reduced.

Following the release of the report on Thursday, US markets were mixed while US Dollar was down. US markers were closed due to 4th of July holiday. The United States is 239 years old.

Standard & Poor 500 ( “SPX” on ThinkorSwim platform) – Hourly

US Dollar ( “/DX” on ThinkorSwim platform) – Hourly

Thank you for reading. If you have any questions, feel free to contact me. You can leave a comment and contact me on this website, google plus, twitter, and linkedin. Thank you.

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Cisco Systems Inc. (NASDAQ: CSCO) Undervalued – Part 1

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Cisco is undervalued (target price will be revealed in part 2)

Cisco Systems Inc. (NASDAQ: CSCO) - 5 Year Daily — Cisco Systems Inc. (NASDAQ: CSCO) – 5 Year Daily

Cisco (NASDAQ: CSCO) – networking giant – designs, manufactures, and sells networking equipments. Founded in 1984, Cisco has grown exponentially over the years. In May, Cisco announced that Chuck Robbins will be the new Chief Executive Officer (CEO) effective July 26, 2015, replacing John Chambers who will assume the role of Executive Chairman and will continue to serve as the Chairman of Cisco’s board. John Chambers is confident Chuck Robbins will continue the positive momentum. I, too, am confident because Chuck Robbins has a great history.

In the past, Robbins has been Senior Vice President (SVP) of Worldwide Field Operations, SVP of the Americas, SVP of Worldwide Sales, SVP of US Enterprise, SVP of Commercial Business, Head of North American Channels, Group Vice President (GVP) of US and Canada channels, and has been a Director of Cisco since May 1, 2015.

Chambers stated “Chuck’s vision, strategy and execution track record is exactly what Cisco needs as we enter our next chapter, which I am confident will be even more impactful and exciting than our last.” Well, I’m also confident that Chuck will do a great job at Cisco, benefiting shareholders.

For someone who has been committed to Cisco for a long time, and held high level roles, I believe he’s the right person for the job. He will be ethical and care about the longer-term at Cisco, instead of short-term maximization.

On May 13, 2015, Cisco reported third quarter earnings and it was relatively strong. Revenue was $12.1 billion, increase of 5% year over year. Net income was $2.4 billion or $0.47 per share on Generally Accepted Account Principles (GAAP), up from previous fiscal year third quarter earnings of $2.2 billion or $0.42 per share.

Cisco Earnings - Quarterly — Cisco Earnings – Quarterly

Revenue for the first nine months of fiscal 2015 year was $36.3 billion and net income, on a GAAP basis, was $6.7 billion or $1.29 per share, compared with $34.8 billion revenue and $5.6 billion or $1.06 per share for the first nine months of fiscal 2014 year.

In 5-year average, Cisco’s revenue and net income has been growing at more than 5%. For company that is so large, 5-year average growth rate is pretty impressive. Not only revenue and net income are impressive, but also gross margin, operating income, operating cash flow, cash on hand, and dividends.

Part 2 will come soon…UPDATE: Click here for Part 2 or https://www.outofwacc.com/cisco-systems-inc-nasdaq-csco-undervalued-part-2/

Note: All information I used here such as revenue, gross margin, etc are found from Cisco’s official investor relations site, and Bloomberg terminal. The pictures you see here are my own.

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The Fed On Hold…For Now

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Last Wednesday (June 17, 2015), Federal Reserve released high anticipated FOMC statement, FOMC Economic Projections, and of course the Federal Funds Rate (interest rate). Federal Open Market Committee (FOMC) kept the interest rates on hold while they decreased their rate projections for 2016 and 2017.

The projections, or “dot plot”, which shows where FOMC members expect interest rates in the future, suggest that there will be one, or two quarter percentage (%) point interest rate increase by the end of the year. In March, the projections suggested more than two quarter percentage increases. That was before they knew that the first quarter of 2015 dragged on the economy…temporarily. 15 of 17 FOMC members believe that the first rate-hike will take place this year, same as March’s projections. Five officials foresee one increase in the rates this year by quarter percentage point, up from 1 official in March. Another five officials foresee 0.50% increase this year, down from seven officials in March. Two officials wants to keep rates unchanged this year. In March, officials did not know if the first quarter slump was temporary or not. They just believed negative economic news were due to “transitory effects” which includes West Port strike, low energy prices, bad weather, and stronger dollar. Now that we been seeing more positive economic news, many officials believe first quarter slump was temporary.

Officials reduced their median estimate for the federal funds rate by the end of 2016 to 1.625% from 1.875% in March, and to 2.875% by the end of 2017, down from 3.125% in March.

FOMC Economic Projections – June 2015 —– Source: Federal Reserve

FOMC Economic Projections - March 2015 ----- Source: Federal Reserve — FOMC Economic Projections – March 2015 —– Source: Federal Reserve

The Fed lowered their economic projections for 2015. They see economic output growth to 1.8% to 2.0%, from 2.3% to 2.7% in March. For 2016, it is seen growing by 2.4% to 2.7%, from 2.3% to 2.7% in March. For 2017, it is seen growing by 2.1% to 2.5%, from 2.0% to 2.4% in March. For 2016 and 2017, it’s essentially the same forecasts. They also changed their forecasts slightly for unemployment rate and inflation.

FOMC Economic Projections - June 2015 ----- Source: Federal Reserve — FOMC Economic Projections – June 2015 —– Source: Federal Reserve

In the statement, Fed policy makers reiterated that they must see “further improvement in the labor market” and be “reasonable confident that inflation will move back to its 2 percent objective over the medium term”. If the labor market continues to improve like they did in May, and inflation continues to improve, I strongly believe we will see rate-hike in July or September. It’s likely to be September because there will be no press conference in July. If the federal funds rate is increased in July, there will so much uncertainty and volatility in the markets because the Fed will not have a chance to explain their actions. However, there still might be rate-hike in July because the Fed wouldn’t want to increase rates too late.

During the press conference, Yellen said “…we have seen some progress. Even so, the Committee judged that economic conditions do not yet warrant an increase in the federal funds rate. While the Committee views the disappointing economic performance in the first quarter as largely transitory, my colleagues and I would like to see more decisive evidence that a moderate pace of economic growth will be sustained, so that conditions in the labor market will continue to improve and inflation will move back to 2 percent.” It shows that the Fed is not confident enough to raise the rates yet. She said that the policy will be “data dependent”. I believe future US economic reports will be positive until December when we might get unfavorable weather again. Bad weather always derails the Fed’s view on the policy because it affects majority of country.

Regarding the US Dollar, or Greenback, Yellen said that the dollar “appears to have largely stabilized” and its significant appreciation is going to continue to drag on the economy for some time to come. The dollar has risen more than 15% against major currencies over the last 12 months.

US markets rose after the Fed announcements while the greenback (US Dollar) slipped. US markets continued to rise the next day.

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SURPRISE!!! RBNZ cuts rates by 0.25%

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Last Wednesday (June 10, 2015), Reserve Bank of New Zealand (RBNZ) cut the Official Cash Rate (OCR) by 0.25% (25 basis points) to 3.25% for the first time since March 2011. According to RBNZ, further easing may be needed if future economic data are weak (“We expect further easing may be appropriate. This will depend on the emerging data.”). They believe Kiwi (NZD) is overvalued and “…further significant downward adjustment is justified.”. I can tell that they badly want Kiwi to decline.

In 2014, RBNZ raised rates four times from 2.50% to 3.50% (March, April, June, July), before pausing further hikes due to price depreciation in oil and dairy.

RBNZ lowered interest rates to boost inflation as growth in New Zealand slows. They are responding to slowing growth as dairy prices fall and inflation is not showing any signs that it will increase. The inflation is near zero and the central bank wants it at 2%, same as other major countries. Consumer Price Index (CPI) inflation currently stands at 0.1%. Fonterra Cooperative Group ltd., the world’s biggest dairy exporter, is a New Zealand company and is responsible for about 30% of the world’s dairy exports. The average prices of dairy has been declining, reflecting on lower inflation. Lower cash rate should help support dairy farmers which will lead to more spending.

The central bank also changed its growth forecast. They see inflation reaching their target–2%–by 4th quarter of 2016, from previous forecast at 3rd quarter of 2017. Why do they think that they will reach their inflation target by the end of 2016? They believe lower rates combined with currency decline (NZD, or Kiwi) will speed up inflation. However, they cut Gross Domestic Product (GDP) forecast for next year from 3.8% to 3.3%.

Screenshot (18) — RBNZ’s GDP growth and CPI forecasts

Screenshot (20) — Real GDP growth projections – Annual

Housing prices in Auckland, New Zealand’s largest city, have increased significantly. Lower borrowing costs (lower rates) might cause housing bubble which can have devastating effect across the country. Graeme Wheeler, governor of RBNZ, said a lack of housing supply is the main cause of surging market prices.

Immediately after the release, NZD (Kiwi) came crushing down. Kiwi against the US Dollar (NZD/USD) fell almost 200 pips to 0.7017, lowest since September 2010. After the immediate drop, I closed my short on NZD/USD, taking almost 800 pips profit. The reason for the close? The pair did not close below the support level around 0.7025. During this kind of news, the pair should have easily closed below the support level. Unfortunately, it did not. Therefore, I closed my position. As of right now, it’s below the support level and I would go short again once it rebounds little bit (and technical analysis of course).

Another news that might support NZD/USD to go lower are positive US economic news and upcoming rate-hike, unless future US economic reports are negative and the tone of the Fed changes to raising the rate later on.

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