Archive for September, 2016

• Morning News: September 19, 2016
  Eddy Elfenbein, September 19th, 2016 at 7:23 am

  There’s An Early Warning Sign That China Is Financially Overheating

  Philippine Central Bank Ordered to Return Recovered Money to Bangladesh

  OPEC ‘Very Close’ to Agreement to Stabilize Market, Maduro Says

  Senate Committee to Discuss Wells Fargo Scandal as Federal Reserve Meets

  What Do We Need to Give the Fed’s Hawks More Room to Fly?

  The Standoff Between Big Oil and Big Corn

  Hanjin Bankruptcy Is The Tip Of The Iceberg For Flailing Shippers

  Australian Port Sold For $7.3 Billion to Group Including Chinese Fund

  Google May Face Indonesia Tax Bill of Over $400 Million For 2015

  Here’s Why Wall Street Loves Alphabet

  Rush to Take Advantage of a Dull iPhone Started Samsung’s Battery Crisis

  Who’s Too Young For An App? Musical.ly Tests the Limits

  GE Brings Off-The-Shelf Biotech Drug Factories to Ireland

  Cullen Roche: Why I Prefer to Think of Stocks as Bonds

  Jeff Miller: Time For The Bond Correction?

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• The Million-Dollar Bet Against Gold
  Eddy Elfenbein, September 16th, 2016 at 3:50 pm

• Was ‘Occupy Wall Street’ a Buy Sign?
  Eddy Elfenbein, September 16th, 2016 at 9:28 am

• CWS Market Review – September 16, 2016
  Eddy Elfenbein, September 16th, 2016 at 7:08 am

  “I don’t expect the consensus to be right. I’m just
  surprised by how wrong it has been.” – Jim Bianco

  The volatility gnomes have returned to Wall Street! As I suspected, they didn’t wait long after Labor Day to make their appearance. This was a long, boring, low-vol summer for the stock market. Each day’s trading turned into a snoozefest.

  That all came to an end last Friday when the S&P 500 dropped 2.45%. The horror! Of course, that’s really not a huge move, but it’s jarring when compared with a summer market that barely registered a pulse. Friday also snapped a string of 43-straight days without a 1% move, either up or down. It also started a three-day run of moves greater than 1%. Check out the high-low-close chart:

  

  Investors need to understand that the volatility gnomes like to move in wolf packs: nothing, nothing, nothing—then suddenly, they’re everywhere. The cause for the recent uptick in volatility is next week’s Federal Reserve meeting. Or more accurately, what the market thinks the Fed is thinking ahead of the Fed’s meeting. The Fed, of course, is equally obsessed with what the market’s thinking.

  In this week’s CWS Market Review, I’ll break it down for you. I’ll also cover the troubling news at Wells Fargo. The bank has been fined $185 million for illegal sales practices. It’s pretty ugly stuff. I’ll also preview the upcoming earnings report from Bed Bath & Beyond. But first, let’s look at the market’s newly found fondness for volatility.

  What to Expect at Next Week’s Fed Meeting

  Financial markets were exceedingly calm this summer. The only exception was the period immediately following the Brexit vote. But even then, the market quickly returned to its somnolence within a few days.

  Next week, the Federal Reserve gets together again, and it’s one of their two-day meetings. This includes a post-meeting press conference by Janet Yellen. The Fed members will also update their economic projections.

  The difference from this meeting is that more Fed members have been vocal about the need to raise rates soon. Bear in mind that central bankers are bred not to say anything remotely interesting. So if they’re speaking this forthrightly, it’s wise to take notice.

  Sure, it’s possible the Fed could raise rates next week, but I’m in the doubter camp. For one, the election is less than two months away. The Fed probably wants to avoid even the appearance of being partisan. Another reason why I think the Fed will stand pat is that we got dovish comments from Fed Governor Lael Brainard. She’s known to be skeptical on the need to raise interest rates, so folks were curious to see if she had changed her tune. She hadn’t.

  Specifically, on Monday Governor Brainard said:

  This asymmetry in risk management in today’s new normal counsels prudence in the removal of policy accommodation. I believe this approach has served us well in recent months, helping to support continued gains in employment and progress on inflation.

  Geez. Even when they say something interesting, it’s still dull.

  Still, these comments helped spark a strong rebound from Friday’s selloff. After her remarks, Goldman Sachs cut their odds of a rate hike from 40% to 25% (still too high, in my opinion) while raising the odds of a rate hike at the Fed’s December meeting from 30% to 40% (still too low, in my opinion). I think a rate hike in December is very much in play.

  Jeffrey Gundlach, who is always interesting to listen to, said the Fed may want to surprise the world by hiking rates next week. Counter-intuitively, Gundlach thinks that by doing this, the Fed could show they’re not swayed by politics or the market.

  The Fed has certainly noticed that the economy is improving, but there are still weak spots out there. For example, on Thursday, we got a disappointing retail-sales report for August. The Census Bureau said that retail sales fell 0.3% last month. That was our first monthly decline since March. This report is disappointing because the numbers relating to consumer spending had been pretty good. Retail sales for July were revised from “unchanged” to 0.1%.

  Also on Thursday, we learned that industrial production dropped 0.4% last month. Economists had been expecting a drop of 0.3%. As with retail sales, this was unwelcome news because industrial production had been recovering from a pronounced drop for much of last year (see below).

  

  The futures market currently thinks there’s a 12% chance of a rate hike next week (take note of Jim Bianco’s words in this week’s epigraph). But for the December meeting, it’s 46.2%. The main reaction within the stock market regarding guesses as to what the Fed will do can be seen between financial stocks and higher-dividend stocks like REITs and Utilities. When the outlook is for higher interest rates, that’s good for the relative performance of financial stocks. But when the outlook is towards lower rates for longer, that helps stocks with higher dividends.

  It’s interesting to note that Financial stocks (XLF) have lagged for the last four days. I also can’t ignore how strong the Tech sector (XLK) has been lately. Apple added $50 billion in market value in three days. The tech rally probably reflects the broader trend of investors being much friendlier towards riskier assets.

  Assuming there will be no rate increase next week, that will draw extra attention to the Fed’s wording in their policy statement. In the Fed’s economic projections, Fed members will likely pare back their estimate for GDP growth for this year. The numbers are coming in well below the Fed’s estimate.

  The Fed’s meeting will be on Tuesday and Wednesday. You can expect to see the Fed’s policy statement followed by Janet Yellen’s press conference on Wednesday afternoon. Now let’s look at the big fine leveled against Wells Fargo.

  The Mess at Wells Fargo

  Last week, Wells Fargo (WFC) was fined $185 million for using illegal sales practices. It’s really ugly what the bank was doing. Their salespeople were opening phony accounts for services customers hadn’t agreed to. It was so widespread that they opened two million bogus accounts. They even transferred customers’ money to new accounts, which resulted in fees for insufficient funds in the original accounts. There were instances of them opening bogus e-mail accounts to get customers into online services.

  It’s easy to blame this on a few unscrupulous sales agents, but these practices were widespread throughout the bank. It all came down to incentives. The salespeople were trying to hit their sales goals.

  In response, Wells has fired 5,300 employees (for context, in June, headcount stood at 268,000). While the bank agreed to pay the fine, they haven’t admitted to any wrongdoing.

  What I find most troubling about this scandal is that it seems to be one centered on improper oversight. How come no one in house put a stop this sooner? The salespeople were rigging, it appears, Wells Fargo’s system as much as they were abusing their customers. This had been going on for years!

  

  Whenever there’s a major financial merger, you’ll often hear about the magic of cross-selling as if the sum of one and one can be made to be slightly greater than two. Unfortunately, it doesn’t work this way. For the most part, people don’t use their primary bank for their mortgage.

  What does this all mean for us as investors in Wells Fargo? That’s tough to say. The shares have now fallen for five-straight days, for a total loss of 7.5%. That hurts, but it’s far from dire. As part of Wells’ overall business, the fine is barely a scratch. Last year, Wells made a profit of $23 billion.

  Still, it’s a black eye to a formerly respected institution. Wells can get through this, but it will take bold action. For example, CEO John Stumpf needs to go, and he needs to go now. The terrible headlines need to stop. For example, the former head of Wells’s consumer-banking division is walking away with $124 million in stock and options. That’s outrageous.

  Wells needs to get ahead of the scandal. Fire some top people. Don’t be defensive. Show the public that you understand what went wrong. I’m not recommending anyone dump the shares. The shares currently yield 3.3%, which isn’t bad. Due to the scandal, however, this week I’m lowering my Buy Below price on Wells Fargo to $50 per share.

  Earnings Preview for Bed Bath & Beyond

  From mid-August to early October, we enter a long stretch where there are no Buy List earnings reports. The only exception is Bed Bath & Beyond (BBBY). The home-furnishing store is due to report its fiscal Q2 earnings on Wednesday, September 21.

  BBBY has been a disappointing stock for us this year. The company badly missed earnings last quarter. Wall Street had been expecting 86 cents per share. Instead, Bad Bath earned 80 cents. What really struck me is that comparable-store sales fell by 0.5%. For now, the company is standing by its full-year profit range of $4.50 to $5 per share. Last year, they made $5.10 per share.

  For Q2, Wall Street expects earnings of $1.17 per share. The one positive I’ll say about this stock is that its valuation is quite cheap. If BBBY hits the middle of its earnings range, the stock will still be going for about nine times earnings. That’s quite low.

  That’s all for now. Next week’s news will be dominated by the Federal Reserve meeting. The Fed’s policy statement is due out at 2 p.m. on Wednesday. The Fed will also include updated economic projections from all 17 members, not just voting members. Additionally, Janet Yellen will give a press conference. Also on Wednesday, Bed Bath & Beyond will release its second-quarter earnings report. 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

• Morning News: September 15, 2016
  Eddy Elfenbein, September 16th, 2016 at 7:03 am

  Russia Bonds Fall After Policy Makers Apply Brakes to Rate Cuts

  S&P 500 Futures Retreat Amid Growth Concerns Before Fed Meeting

  Deutsche Bank to Fight $14 Billion Demand From U.S. Authorities

  NAFTA Burn: The Real Ford Escape? Moving Its Small-Car Production to Mexico

  Exxon’s Accounting Practices Are Investigated

  Colonial Pipeline Issues Likely to Disrupt Gas Supply on East Coast

  Wells Fargo CEO Defends Bank Culture, Lays Blame With Bad Employees

  Bayer, Monsanto Shareholders Not All Cheering Over $57 Billion Deal

  iPhone Buyers Poised for Letdown as Apple Supply Trails Demand

  EpiPen Maker Mylan Quietly Steers Effort to Protect Its Price

  A Decades-Old Drug Technology Finally Nears Its Big Breakthrough

  How Did G.M. Create Tesla’s Dream Car First?

  GE Wins $1.9 Billion Order From UK’s Hinkley Point Nuclear Plant

  Roger Nusbaum: Eight Brutal Truths About Retirement

  Josh Brown: “We Have Never Seen Anything Like This”

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• What’s Really Driving Apple Higher?
  Eddy Elfenbein, September 15th, 2016 at 5:16 pm

• Morning News: September 15, 2016
  Eddy Elfenbein, September 15th, 2016 at 7:10 am

  Volatility Erupts in Currencies as Stimulus Appetite Seen Waning

  EU Hopes Licensing System Will Help Save Indonesian Forests

  Swiss Central Bank Keeps Policy Loose To Curb Strong Franc

  As Britain Confronts ‘Brexit,’ a Canadian Is in Charge

  Hinkley Point: Is The UK Getting a Good Deal?

  Political Paralysis Is the Biggest Threat to U.S. Competitiveness

  Wells Fargo And The True Cost of Culture Gone Wrong

  Buffett Loses $1.4 Billion as Wells Fargo Tumbles on Scandal

  Warren: Next Administration Should Probe, Maybe Jail Wall Street Bankers

  Bayer Clinches Monsanto With Improved $66 Billion Bid

  Apple Says Initial Quantities of iPhone 7 Plus Sold Out

  Samsung Stumbles in Race to Recall Troubled Phones

  Walmart Canada to Extend Visa Ban to More Stores From October 24

  Your Next Trans-Atlantic Trip May Be on Boeing’s Diminutive 737

  Jeff Carter: The Visionary vs. The Operator

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• Morning News: September 14, 2016
  Eddy Elfenbein, September 14th, 2016 at 7:07 am

  BOJ to Make Negative Rates Centerpiece of Future Easing

  Eurozone Industrial Output in Big July Fall

  No ‘Brexit Effect’ in Latest Jobs Data

  E.U. Rules Look to Unify Digital Market, but U.S. Sees Protectionism

  What To Make Of Bond Yields

  There’s a $300 Billion Exodus From Money Markets Ahead

  The Economic Expansion Is Helping the Middle Class, Finally

  Bayer Said to Agree to Pay About $56 Billion for Monsanto

  Ford Motor Says 2017 Financial Results to Drop From 2016 Levels

  Hedge Fund Manager Who Spotted Fraud at Enron Calls Tesla ‘The Anti-Amazon’

  Microsoft Beats Out Rivals for HP Software Deal

  How Halal Food Became a $20 Billion Hit in America

  Stumpf, the Mr. Clean of Banking, Finds Himself Mired in Scandal

  Cullen Roche: Warren Buffett is (Actually) Losing His Hedge Fund Bet

  Howard Lindzon: You’ve Been Rothenberged…Thanks Harvard

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• Daily Changes Since July 1
  Eddy Elfenbein, September 13th, 2016 at 2:43 pm

  Check out the daily changes for the S&P 500 since July 1. The market went 43 days in a row without a 1% swing. Now it’s looking at its third in a row over 1%.

  

  Volatile days are not evenly spread out. They tend to travel in wolf packs. Once you think the market can’t be more complacent, the dramatic days come.

• Hilsenrath: Fed Is a No-Go for Next Week
  Eddy Elfenbein, September 13th, 2016 at 10:21 am

  In today’s WSJ, Jon Hilsenrath says that the Fed will probably not raise interest rates next week.

  That’s what I expected. Hilsenrath is generally considered to be the Fed’s main go-to guy. In other words, when Hilsenrath says “senior Fed officials,” he means very senior.

  Federal Reserve officials, lacking a strong consensus for action a week before their next policy meeting, are leaning toward waiting until late in the year before raising short-term interest rates.

  It is a close call. But with inflation holding below the Fed’s 2% target and the unemployment rate little changed in recent months, senior officials feel little sense of urgency about moving and an inclination toward delay, according to their public comments and recent interviews.

  (…)

  With the jobless rate at 4.9%, some regional Fed bank presidents believe that the labor market has largely recovered from the financial crisis of 2007-2009, and that short-term interest rates just above zero are no longer warranted. This group notes that risks to the U.S. economy from overseas have dissipated in recent weeks, strengthening the case for a move now.

  For others, the watchword is patience. This group largely expects to raise rates this year but doesn’t see a need to act now. These officials note the jobless rate hasn’t moved much this year. Slack in the labor market is thus diminishing at a slower pace than before. That has reduced the urgency to raise the cost of credit to prevent the economy from overheating.

  Moreover, because the economy is growing so slowly, this group doesn’t believe rates need to move very high in the months and years ahead, thus the Fed can take its time.