CWS Market Review – December 15, 2017

“They say you never go broke taking profits. No, you don’t. But neither do
you grow rich taking a four-point profit in a bull market.” – Jesse Livermore

This week, the Federal Reserve decided once again to raise interest rates. True, interest rates are still quite low, but a lot of folks thought these hikes were a long way off (including me). Now they’ve really happened.

The Fed also released its economic projections for the next few years. They see more rates coming next year (call me a cautious doubter on that). Remember, the environment for stocks will remain favorable as long as rates don’t get too high. We’re not there yet, so stocks are still good.

Speaking of which, the S&P 500 touched another all-time high this week. This continues to be a very good environment for stocks. Strangely, a lot of investors have left the stock market and tried their hands at crypto-currencies. I’ll give you my thoughts on bitconmania.

Reminder: Next week, I’ll unveil the 2018 Buy List. Millions of investors all over the world are eagerly awaiting our new list. I can barely contain my excitement. Stayed tuned! But first, let’s look at what the Federal Reserve decided to do this week.

The Federal Reserve Raises Rates

On Wednesday, the Federal Reserve again raised interest rates. The new range for the Fed funds rate is 1.25% to 1.50%. This was the third increase this year and the fifth for this cycle. As I’ve said before, I think it was a mistake to raise rates, but I can’t say it’s a terrible, horrible, no good, very bad mistake. Two FOMC members agreed with me and dissented from this decision.

In the Fed’s statement, they noted the good economic news. They said “job gains have been solid” and “economic activity has been rising at a solid rate.” (I think “solid” was the word of the month.)

The Fed also noted that inflation has trended lower in recent months, but they think it will rise to 2%, which is their target rate. I’m not so sure about that. This week, we got the inflation report for November and inflation is still well behaved. For November, headline inflation rose by 0.39%, and the “core rate,” which excludes food and energy, rose by just 0.12%. In the last 12 months, headline inflation is running at 2.20% while the core rate is at 1.71%. In fact, the year-over-year core rate has barely moved in the last six months. Maybe the Fed is right and low inflation will pass, but I see no signs of it yet.

The Fed also released its economic projections for the next few years. The Fed members are more optimistic on economic growth for next year. In September, they saw GDP rising by 2.1% next year. Now they see it rising by 2.5%. I hope that’s right.

The members project three more rate increases for next year. After that, they see two more hikes in 2019 and another one or two in 2020. I should caution that the range of estimates is very diffuse for 2019 and 2020. I don’t put much faith in forecasts that far out.

If the Fed’s near-term forecasts are right, that will mean that real short-term rates will finally be positive sometime next year. It will probably happen sometime in June. That will end 10 years of negative real rates.

The Fed is right to be optimistic for the economy. This week, we got a very good report on retail sales for November. Hopefully, that’s an omen for strong holiday sales. Thursday’s initial claims report came very close to being the lowest in more than 44 years.

To sum up: Things are looking very good right now. I’m not worried about stocks, especially our Buy List. The Fed will eventually screw this up, but not for a while.

My Thoughts on Bitcoin

A number of investors have asked me for my opinion on bitcoin. It seems to be the topic of the season. This week, bitcoin futures were unveiled on Wall Street.

I haven’t commented much on bitcoin for the simple reason that I don’t know much about it. Unlike too many people in finance, I prefer to limit my comments on topics I’m familiar with.

With that caveat, let me offer some thoughts on investing in bitcoin. I would summarize my position as ranging between agnostic to intrigued on the future for bitcoin as an instrument, yet I’m very negative on the idea of bitcoin’s place in a sound portfolio.

I want to make it clear that I’m not anti-bitcoin in any sense. I welcome the idea of a stateless cyber currency. We need disruption. Bitcoin, and its many competitors, have made truly impressive gains.

I do have a few concerns. At the top is the currency’s dramatic volatility. Bitcoin routinely gaps up or down by 10% or more in a trading session. Until that slows down, I think it will limit bitcoin’s acceptance in regular daily use.

A currency needs to be two things: a store of value and a medium of exchange. Bitcoin is really good at the former but not so hot at the latter. This needs to change. I’m also concerned about the amount of fraud and theft. Of course, this can happen with any currency, but the problem seems especially acute with bitcoin. Also, a lot of these shady initial coin offerings won’t end well. Make no mistake—a lot of crypto-heads understand the challenges and they’re working to solve them. We’re still early in this game.

I think there’s a very good chance that bitcoin will eventually fall by the wayside as rivals, like Etherium, prove to be more durable. Emergent technologies tend to invite intense competition followed by extreme consolidation. Bitcoin is no different.

Now I want to turn to the idea of investing in bitcoin. I have no issue if someone wants to buy a few BTC to be part of the phenomenon. Sure, why not? What I mean to address is the idea of bitcoin’s place in a serious investment portfolio. That’s nuts.

We have to be up front with the fact that bitcoin is in a very big bubble. Like all bubbles, it feeds on itself and you never know where it will end. I often tell investors that true bubbles are rare. A rising stock market probably isn’t a bubble. A bubble is when an asset soars for many times what it could possibly be worth. Bitcoin will pop. I just don’t know when.

To show you how bananas things are, a biotech company recently changed its name to Riot Blockchain. The shares went from $7 last to month to as high as $33 this week. Now that’s a mania. A bubble is when something is soaring for no other reason than that it’s been soaring. The mania feeds upon itself as investors are afraid of being left behind. That’s what’s going on now.

I’m staying far away from bitcoin. It’s a new game, and I admit I don’t know the rules (nor does anyone else). Around here, we approach investing like it’s a business because that’s what it is. When we look at a company, we analyze real things like sales and earnings, but with bitcoin, there’s nothing. It’s guessing at the breeze. I don’t see how anyone can estimate where the price should be right now.

I wish bitcoin well, but it has no part of a long-term investment portfolio.

Buy List Updates

We have a Buy List earnings report next week. After the close on Monday, December 18, HEICO (HEI) is due to report its fiscal Q4 earnings. That’s for the quarter ending on October 31. A conference call will come on Tuesday morning.

In August, HEICO raised its guidance for full-year earnings. They previously expected full-year net income growth of 12% to 14%. They now expect net income growth of 14% to 16%.

HEICO doesn’t provide per-share guidance, so we need a little math. By my numberifying, the new guidance implies Q4 earnings of 55 to 59 cents per share and full-year earnings of $2.08 to $2.12 per share. The stock is a 48% winner for us this year.

This week, Express Scripts (ESRX) gave an upbeat forecast for Q4 and for 2018. The pharmacy benefits manager said they see EPS for next year ranging between $7.67 and $7.87. Wall Street had been expecting $7.65 per share. That’s good to see.

Express also raised its 2017 forecast to $7.00 to $7.08 per share. That’s a three-cent increase at both ends. Through the first three quarters of this year, Express has earned $4.94 per share. That means the new range implies Q4 earnings of $2.06 to $2.14 per share.

Before I go, I want to raise my Buy Below prices on two of our Buy List stocks. I’m raising our Buy Below on Ingredion (INGR) to $146 per share. I’m also raising AFLAC (AFL) to $93 per share. The duck stock hit a new all-time high this week.

That’s all for now. There are a few economic reports to look out for next week. On Wednesday, we’ll get the existing home sales report. The last one was quite good. Then on Thursday, we’ll get the second update on Q3 GDP growth. The initial estimate was for 3.0% growth which was later revised up to 3.3%. Let’s see if it goes any higher. Be sure to keep checking the blog for daily updates. I’ll have more market analysis for you in the next issue of CWS Market Review!

– Eddy

Posted by on December 15th, 2017 at 7:08 am


The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.