Archive for November, 2016

• Morning News: November 22, 2016
  Eddy Elfenbein, November 22nd, 2016 at 7:15 am

  Brexit Buffets Brits, Yen Boosts Japanese Among Ranks of Global Rich

  Nasdaq’s New CEO Prepared Years for the Job. Then Trump Happened

  Trump’s Pick For Attorney General Could Be Bad News for Silicon Valley

  Nominating Mnuchin for Treasury Will Dredge Up Mortgage Meltdown Controversies

  Trump’s Jobs Boom Clashes With Virtual Reality of Dancing Babies

  Investors Make Bullish Bet on Trump, and an Era of Tax Cuts and Spending

  Volkswagen Puts Conquering Americas at Heart of Turnaround Plan

  Daimler Chief Removed After ‘Racist Rant’ in China

  Tyson Shares Slide as Company Names New CEO and Warns on Profit

  Lufthansa Cancels Eurowings Flights With Pilot Hit Due Wednesday

  Disney Sets Out to Build Bigger Kingdom in Hong Kong

  Elon Musk vs. the Trolls

  Exxon Mobil Accuses the Rockefellers of a Climate Conspiracy

  Roger Nusbaum: Still Trying to Decipher the Post Election Market

  Josh Brown: There Is Zero Evidence of a Long-Term Correlation Between Stocks and The Dollar

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• Blogging to Buying: Wall Street Writer Launches ETF
  Eddy Elfenbein, November 21st, 2016 at 6:47 pm

• Amazing Facts About the Economy
  Eddy Elfenbein, November 21st, 2016 at 8:07 am

  I’m borrowing this idea from Morgan Housel who would periodically list fascinating facts about the economy.

  Largest oil deposit ever found in U.S. discovered in Texas

  Divorce in U.S. Plunges to 35-Year Low

  Over the last two centuries, the number of people living in extreme poverty has fallen from 94% to under 10%.

  Adjusted for inflation, airline tickets have fallen in half from 30 years ago.

  Over the last 40 years, 86% of the increase in government jobs have gone to women.

  In 1998, Kodak had 170,000 employees and sold 85% of all photo paper worldwide. Within just a few years, its business model disappeared and it went bankrupt.

  The average American woman now weighs as much as the average American man did in the 1960s.

  Every major cable TV company lost subscribers last quarter.

  Since 1932, most of the S&P 500’s capital gain has come during a seven-day period at the turn of each month—specifically, the last four trading days and the first three trading days of each month. This represents about one-third of the total trading days. During the rest of the month, the stock market actually lost money.

  Over the last 20 years, the Dow gained 253.49% on Monday and Tuesday combined. But it lost 3.67% on Wednesday, Thursday and Friday.

  In 2000, Goldman Sachs had 600 traders in New York City making markets in US stocks. Today, that number is down to fewer than 10.

  In 2010, China naturalized 1,448 people. In America, the figure is about 700,000.

  A 34-year-old junk bond trader made $100 million this year.

  In Japan, you can rent a man to listen to you; 70% of the clients are women.

  36% of online shoppers won’t buy something unless it has free shipping.

  In 1967, World Airways applied to fly cross-country routes for $75. At the time, the Civil Aeronautics Board had to approve all prices and routes. Five years later, the CAB declined the request saying the application was stale.

  In 1940, Ida May Fuller got the first social security check. The check number was 00-000-001. She lived to 100 and collected $22,888 in benefits.

  Over the last 25 years, clothing prices have gone down.

  China has 105 cities with over 1 million people in the metropolitan area.

  According to Morningstar, 47% of mutual fund mangers do not personally own any of their own fund.

  Germany paid off the last of their World War I reparations in 2010.

  Every year, the United States sends Cuba a check for $4,085 as part of its lease of Guantanamo Bay. Every year, Cuba refuses to cash it.

  On August 5, 2009 a record 347 million shares Citigroup were traded. That’s about 15,000 shares per second for the entire 6.5-hour session.

  According to the Bank for International Settlements, as of April 2016, average daily turnover in global foreign exchange markets is estimated at $5.09 trillion.

  Norway’s sovereign wealth fund is worth $874 billion. That’s about $170,000 per person.

  North Dakota has a state-owned bank. “It is more profitable than Goldman Sachs Group Inc., has a better credit rating than J.P. Morgan Chase & Co. and hasn’t seen profit growth drop since 2003.”

  From June 6, 1983 to April 17, 2003, Apple’s stock fell 16%. That’s nearly 20 years.

  The Dow Jones didn’t break its high from September 3, 1929 until November 23, 1954.

  Between September 20, 1929 and October 9, 2002, the Dow Utility average grew by 16% ex dividends.

  In the United States there are, on average, 1,700 new millionaires every day.

• Morning News: November 21, 2016
  Eddy Elfenbein, November 21st, 2016 at 7:17 am

  British Prime Minister to Pledge Investment Into R&D

  Metal Prices Climb as China Backs Free-Trade Zone

  Trump’s Offshore Cash Plan Will Benefit Investors Not Jobseekers

  Symantec Is Acquiring LifeLock for $2.3 Billion

  China’s Anbang May Buy $2.3 Billion in Japanese Property From Blackstone

  Walmart Starting Post-Black Friday Online Sales Earlier to Fight Amazon

  Alibaba Cloud Stretches Global Reach With Four New Facilities

  Facebook Considering Ways to Combat Fake News, Mark Zuckerberg Says

  Inside a Moneymaking Machine Like No Other

  Microsoft Spends Big to Build a Computer Out of Science Fiction

  How Apple Empowers, and Employs, the American Working Class

  Snapchat’s Spectacles Are Now On Sale in New York City

  Ritholtz to Trump, Investors: Chill Out

  Jeff Miller: Possible Stimulus and How to Pay

  Cullen Roche: A Lesson from the Market’s Overreaction to Trump’s Win

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• CWS Market Review – November 18, 2016
  Eddy Elfenbein, November 18th, 2016 at 7:08 am

  “I’m always fully invested. It’s a great feeling to be caught with your pants up.”
  – Peter Lynch

  Before I get to today’s CWS Market Review, I have two quick announcements. The first is that I’ll be announcing our 2017 Buy List in the December 23 newsletter. For next year, I’m going to expand our Buy List to 25 names. I wanted to add a little padding for diversification, so stay tuned for our new list.

  The other announcement is that I’m taking Thanksgiving off, so there will be no CWS Market Review next week. Please do not panic. The regular newsletter will return on December 2. I’ll also be updating the blog and Twitter.

  

  Now to Wall Street. We’re still working our way through the unexpected reaction to the unexpected election. Let me run down just a few of the milestones we saw this week. On Tuesday, the Dow rose to an all-time high. The S&P 500 is currently very close to an all-time high (see above). The U.S. dollar rose to a 14-year high. Initial jobless claims fell to a 43-year low. Housing starts are at a nine-year high. The Russell 2000 Index of small-cap stocks has rallied for 10 straight days.

  Wow! That’s enough milestones for one year, but we saw all that action this week. I’ll explain what it all means for us, and for our Buy List. Speaking of which, I’ll cover the outstanding earnings report from Ross Stores. The deep discounter continues to churn out impressive earnings. Later on, I’ll preview next week’s earnings report from Hormel Foods, and I have some Buy List updates. But first, let’s look at the post-election rally.

  The Trump Rally Takes over Wall Street

  Goldman Sachs predicted that a Trump victory would sink the market. They later revised that to say that it would have little effect. They were wrong on both counts. The folks at Goldman probably aren’t too broken up about being wrong. In the four days following the election, the bank increased in market value by $11 billion.

  The post-election rally has been pretty dramatic for two reasons. This first is obviously the size of the rally. The Dow Industrials gained 920 points in four sessions and later broke through to an all-time high. Since November 3, the S&P 500 has gained nearly 5%, and it currently stands just below its all-time from August. In fact, if you include dividends, the S&P 500 Total Return Index is already at an all-time high.

  The second reason why this rally has been so dramatic has been the internal rotation we’ve seen. The most noticeable effect is the move away from bonds. Since November 4, the entire long end of the yield curve, from five year to 30 years, has seen an increase in yields of roughly 50 basis points. That’s a huge move for such a short period of time. Interestingly, the move is about the same for any point along the yield curve beyond five years out.

  

  What does all this mean? Simple: It’s a signal from the market that it expects more economic growth and more inflation. The yield on the 10-year Treasury is now higher than the stock market’s dividend yield. CNBC asked me this week if I thought this was a danger for stocks. I said that it wasn’t. Investors aren’t dumping bonds for gold. No, they’re dumping bonds for stocks.

  But importantly, what kind of stocks? It’s chiefly banking (like Goldman) and heavy-industry sectors. Anything with a smokestack and guys with hardhats. Wabtec (WAB) would be a good example. Put it this way: If it figures in a Bruce Springsteen song, then it’s probably been rallying like crazy this week. The Industrials ETF (XLI) gained 9% in just seven days. By its nature, that sector usually doesn’t stray far from what everyone else is doing. Not lately. XLI has been en fuego. This is the XLI divided by the S&P 500.

  

  That’s also why the Dow has been charging higher than the S&P 500. We forget that the Dow 30 is officially the Dow Jones Industrial Average. Most of the time, the difference is too small to notice. Not now.

  Many small-cap indexes are skewed towards domestic manufacturers. Obviously, the mega-cap stocks are more likely to be sprawling multinationals. As a result, the small-cap Russell 2000 has been on a blistering rally. It’s the same effect going on with higher bond yields and higher industrials. The Russell 2000 is now up 10 days in a row for a total gain of 13.3%.

  For the past few months, I’ve talked about how investors have been willing to migrate to riskier assets. What we’re seeing is a continuation of that trend. For example, utilities and REITs have been going nowhere lately. If you recall, utes were King of the Mountain late last year when everyone wanted safety. Or more precisely, what some people thought was safe. Now what’s risky is not having exposure to the economic cycle. Funny how that changes.

  The wider the yield curve, the greater the expectation the market has for future growth (generally). The yield spread is getting wider as investors load up on financials. Remember that a bank is nothing more than the yield curve with incorporation papers. The wider yield spread is also helping industrials, and that helps industrial metals. Copper recently rallied 14 days in a row. (Fun fact: An average single-family home uses 439 pounds of copper.)

  This has also caused investors around the world to flock to the U.S. dollar. The greenback has suddenly become the belle of the ball. The U.S. Dollar Index (DXY) just touched a 14-year high (see below). The Federal Reserve almost seems certain to raise interest rates next month, but I don’t believe investors need to be fearful of the Fed. At some point, a strong dollar will weigh heavily on our exports, but we’re not quite there yet.

  

  To be fair, the pieces for the Trump rally had been building for several weeks. The election brought them all together at once. The Atlanta Fed now sees Q4 GDP coming in at 3.6%! This is an excellent time to be an investor. Investors should continue to be focused on a core group of high-quality stocks such as our Buy List. And with that, let’s look at the very good earnings report from Ross Stores.

  Ross Stores Earned 62 Cents per Share

  After the closing bell on Thursday, Ross Stores (ROST) reported fiscal Q3 earnings of 62 cents per share. That was six cents more than Wall Street had been expecting. It was also well above the company’s own guidance range of 52 to 55 cents per share.

  Looking through the numbers, it’s clear Ross had a very solid quarter. EPS rose 17% from a year ago. Quarterly sales rose 11% to $3.1 billion. I was especially impressed with their comparable-store sales growth of 7%. That’s outstanding.

  Barbara Rentler, Chief Executive Officer, commented, “We are very pleased with our better-than-expected sales and earnings growth in the third quarter as customers responded favorably to the compelling values we offered throughout our stores. Operating margin of 12.6% was ahead of plan, increasing 55 basis points mainly from a higher merchandise margin.”

  Ross’s guidance, however, was a bit conservative. To be fair, the company often gives subdued forecasts. Perhaps they like to impress later by beating expectations. This is what the company had to say:

  Ms. Rentler continued, “As we enter this year’s holiday season, we face our most challenging multi-year sales comparisons. In addition, the ongoing uncertainty in the macro-economic, political, and retail environment could, once again, lead to a very promotional fourth quarter.”

  For Q4, Ross sees comparable-store sales growth of just 1% to 2%, and earnings per share ranging between 72 and 75 cents per share. Since Ross has already made $2.06 per share for the first three quarters, that works out to full-year earnings of $2.78 to $2.81 per share. That would be an increase of 11% to 12% over last year’s profit of $2.51 per share.

  I’m not at all worried about the conservative guidance. Even if they hit it, Ross has still had a great year. This week, I’m raising my Buy Below on Ross Stores to $70 per share.

  Hormel Foods Earnings Preview

  Hormel Foods (HRL) will release its third-quarter earnings before the market opens on Tuesday, November 22. Wall Street expects earnings of 45 cents per share. I also expect the Spam maker to increase its dividend. This will be its 51st consecutive annual dividend increase. Not too shabby.

  Three months ago, Hormel reported earnings of 36 cents per share which beat consensus by a penny. Quarterly revenues rose by 5.2% to $2.3 billion, which was a little better than expectations. That was Hormel’s 13th quarter in a row of record earnings.

  Hormel had solid results across the board. Thanks to the inclusion of Applegate, Hormel’s refrigerated-foods segment saw its profits rise by 24%. Their Jenny-O Turkey biz had a profit increase of 59%. Last year’s profits were impacted by the avian flu, so it’s nice to see a big increase here.

  I was especially pleased to see Hormel raise its full-year guidance. The old range was $1.56 to $1.60 per share. The new range is $1.60 to $1.64 per share. Look for another good earnings report on Tuesday.

  Buy List Updates

  The unexpected, but pleasant, rally pushed several Buy List stocks beyond their Buy Below prices. I was surprised by the post-election reaction. I want to take this opportunity to adjust a few of our Buy Below prices. Starting with our bank stocks, I’m lifting the Buy Below on Wells Fargo (WFC) to $52 per share, and on Signature Bank (SBNY) to $150 per share. The turnaround in SBNY has been remarkable.

  

  Shares of Cerner (CERN) have been plunging. The company just announced a $500 million share-repurchase program. That works out to 3.1% of their outstanding shares. I’m lowering my Buy Below on Cerner to $55 per share.

  I also want to lift the Buy Below price on Biogen (BIIB) to $320 per share, and on Wabtec (WAB) to $85 per share. Can you believe that WAB is now our third-best performer this year, with a 21.2% gain? Only four months ago, it was -7% for the year. How quickly things can change. After the poor July earnings report, I wrote, “This is a disappointing report from Wabtec, but I’m not ready to throw in the towel. This is a solid company.” I’m glad we stuck with them.

  Before I go, a quick update on Fiserv (FISV). The company’s board of directors announced an expansion to its share-buyback program of 15 million shares. That’s 6.9% of the outstanding shares. This is an outstanding company.

  That’s all for now. The stock market will be closed on Thursday, November 24 for Thanksgiving. The market will close at 1 p.m. on Friday. The Friday after Thanksgiving is often the lightest trading day of the year. There’s not much in the way of news next week, but I’ll be curious to see the minutes of the Fed’s last meeting. Those will come out on Wednesday at 2 p.m. 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: November 18, 2016
  Eddy Elfenbein, November 18th, 2016 at 6:43 am

  Selloff Pulls Japanese Bond Yields Further Above Zero

  China’s Soaring Housing Market Finally Takes a Breather

  Gold Seen as ‘Biggest Victim’ on Rising Interest Rates, Dollar

  Jobless Claims in U.S. Decline to Lowest Level in Four Decades

  Snapchat Founders Prove That Turning Down Facebook’s $3 Billion Wasn’t Such a Bad Idea After All

  Swire Pacific to Buy Coca-Cola Bottling Assets in China for $852 Million

  Volkswagen Plans 30,000 Job Cuts Worldwide

  Ford Confirms Donald Trump Tweet, Won’t Move Lincoln Production Out of Kentucky

  Valeant’s Pharmacy Ties Get Even Murkier

  Bloomberg to End Its Daily Politics Show

  Uber and Houston Make Temporary Peace as Super Bowl Approaches

  Fake News on Facebook? In Foreign Elections, That’s Not New

  Blah Blah Blah: A Renowned Economist Sums Up the State of Macroeconomics

  Howard Lindzon: Is Trump Presidency Chaos or Puppies, Lollipops and Balloons?

  Jeff Miller: Stock Exchange: Spotting a Great Chart

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• Initial Claims Fall to 43-Year Low
  Eddy Elfenbein, November 17th, 2016 at 12:39 pm

  Trump works fast! He’s not even president yet, and there’s already good news. This morning, we learned that initial unemployment claims fell to 235,000 last week (seasonally adjusted).

  That’s the lowest since November 24, 1973 when it hit 233,000. Of course, the country’s population is more than 50% larger than it was 43 years ago.

• Markets Have a Time Tough with Longshots
  Eddy Elfenbein, November 17th, 2016 at 12:28 pm

  This Sunday, the New England Patriots are playing the San Francisco 49ers. In a football sense, this probably won’t be a very interesting game. The Patriots are quite good this year, and the 49ers are not.

  However, in a betting sense, this is a very interesting game. The reason is because the Patriots are favored to win by 13 points. I’ve actually seen as high as 14 points, but let’s say 13 for now. It’s very unusual for a visiting team to be favored so strongly. This will be the widest spread for a visitor in three years.

  What does this have to do with financial markets? Well, let’s take a step back and view betting markets as cousins of the stock market. Both have buyers and sellers who set prices, and the participants are trying to beat the odds.

  Just like index funds, the data shows that point spreads are, for the most part, pretty accurate. It’s hard to beat them over the long haul, especially when include the vig (the bookie’s cut).

  But there is a blind spot for the market, and that’s in extreme events. The market (meaning people) are pretty good at setting odds for most things. But once you start getting to extremes, they’re not so good.

  To my mind, the best example is lotteries. In a rational world, lotteries wouldn’t exist. They make no sense. But they do exist because people play for the extreme odds. If the payoff wasn’t extreme, they wouldn’t play.

  We see this in the stock market when high valuation stocks tend to underperform. People invest in biotechs similar to lottery tickets—they expect a few losers for that one giant winner. I suspect that’s why value stocks have outperformed historically. It’s not so much that they’re better, it’s that the high growth/high valuation stocks underperform. By definition, that means the opposite will outperform.

  Since 1978, there have been 175 games in which a visiting team has been favored by 10 or more points. Excluding three “pushes,” the visiting team has failed to cover the spread in 104 games, or 60.5% of the time. That’s pretty high for the sample size. Nothing else comes close.

  If the market truly has a problem pricing extreme events, is such a football betting strategy exploitable? Eh…not really. These games come along an average of four or five times a year.

  Just like investing, it pays to be disciplined and patient.

• The stocks that are soaring after Trump’s win
  Eddy Elfenbein, November 17th, 2016 at 11:57 am

• Subdued Inflation for October
  Eddy Elfenbein, November 17th, 2016 at 11:49 am

  This morning, the government said that consumer prices rose by 0.4% last month. The increase was driven by higher gas prices. Wall Street had been anticipating that, and the report matched expectations.

  But if you take out volatile food and energy prices, the core rate, then inflation rose by just 0.1% in October. That was below expectations of 0.1%.

  I had been looking forward to this report because it could have shown the highest year-over-year increase in core inflation in eight years. Alas, that didn’t happen. Over the last 12 months, core inflation was 2.2%. This February, it was 2.3%.

  Still, the trend is that inflation appears to be rising. We can’t be certain just yet. I’m not concerned about a modest rise in inflation. I’ve looked at this historical data and inflation hasn’t historically been a problem for stocks until it hits 5%. We’re a long way from that.