Archive for December, 2016

  • Irrational Exuberance 20 Years On
    , December 5th, 2016 at 8:25 am

    It was 20 years ago today that Alan Greenspan made his famous “irrational exuberance” speech. Here’s the money paragraph from that speech:

    Clearly, sustained low inflation implies less uncertainty about the future, and lower-risk premiums imply higher prices of stocks and other earning assets. We can see that in the inverse relationship exhibited by price/earnings ratios and the rate of inflation in the past. But how do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions as they have in Japan over the past decade? And how do we factor that assessment into monetary policy? We as central bankers need not be concerned if a collapsing financial asset bubble does not threaten to impair the real economy, its production, jobs, and price stability. Indeed, the sharp stock market break of 1987 had few negative consequences for the economy. But we should not underestimate or become complacent about the complexity of the interactions of asset markets and the economy. Thus, evaluating shifts in balance sheets generally, and in asset prices particularly, must be an integral part of the development of monetary policy.

    It doesn’t seem that dramatic, but at the time, it was taken very seriously. The next day, the Dow dropped 144 at its open. That may not sound like much today, but it was a loss of 2.2%. That’s equivalent to 430 points today. However, the Dow soon recovered some lost ground, and by the closing bell on December 6, it had shed 55 points (all the way down to 6,381.94).

    Greenspan’s famous phrase came from Robert Shiller. I can’t confirm if Shiller was referring to his cyclically adjusted price/earnings ratio, also known as CAPE. Instead of using trailing earnings for one year, CAPE goes back ten years.

    I’m not a big fan of CAPE. It’s shown the market to be overpriced for almost all of the last 25 years. I’m also not a big fan of trying to time the market based on any valuation measure. The stock market continued to rally for another three years after Greenspan’s speech. Incidentally, Shiller later came out with a book titled Irrational Exuberance.

    I get complaints every time I say this, but I’ll repeat that market bubbles are actually quite rare. A bubble is not when p/e ratios go from 15 to 18. A bubble is when they go to 30 and beyond, and the IPO market goes nuts.

    Here’s a look at how the market has done over the last 20 years. This is the Wilshire 5000 Total Return Index, which includes dividends. The red line is the Consumer Price Index:

    fredgraph12052016

    Since Greenspan’s speech, the total return of the Wilshire 5000 has been 346.5%. That’s 7.77% annualized. I’m reminded of Peter Lynch’s words: “Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.”

  • Morning News: December 5, 2016
    , December 5th, 2016 at 7:07 am

    Oil Advances to 16-Month High as Focus Shifts to Non-OPEC Cuts

    British Services PMI Hits 10-Month High, Points to Solid Fourth Quarter Growth

    What Italy’s Referendum Means for Monte Paschi

    Greenspan’s Irrational Exuberance Looks Entrenched, 20 Years On

    How Trump Plans To Punish Firms That Leave US

    Trump Advisors Aim to Privatize Oil-Rich Indian Reservations

    Silicon Valley’s Culture, Not Its Companies, Dominates in China

    Automotive Tech Flying Off the Lot

    Aixtron Sees Slim Path to Save China Sale After Obama Order

    Hong Kong’s CKI Returns to Australia With $5.4 Billion Bid For Duet Group

    SoftBank’s Masayoshi Son Chases First Place With Tech Deals

    RBS Will Pay Up to $1 Billion Over 2008 Rights Issue Claims

    Israeli Businessman Nochi Dankner Gets Jail Term for Stock Fraud

    Josh Brown: Chart o’ the Day: Unemployment Plunges

    Howard Lindzon: AngelList and Product Hunt…Smart!

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  • How One Trader Made Big Money By Betting on Trump
    , December 4th, 2016 at 9:14 am

  • 20th Anniversary of “Irrational Exuberance”
    , December 3rd, 2016 at 5:38 pm

  • Can GS, UNH & CAT Continue to Drive Dow?
    , December 2nd, 2016 at 4:10 pm

    For some reason, my ear thing played a delayed echo of me as I spoke. That’s very hard to speak over. I have newfound respect for television hosts who can manage that, because it’s not easy. I hope I didn’t come across as too awkward.

  • November NFP = 178K, Unemployment Rate Drops to 4.6%
    , December 2nd, 2016 at 9:29 am

    The November jobs report shows that 178,000 net new jobs were created last month. The jobless rate fell to 4.6%. Spitting out the decimals, that’s the lowest jobless rate since August 2007.

    Average hourly earnings for private-sector workers rose 2.5% in November compared with a year earlier. Wage gains had been accelerating this year as competition for workers intensified. October’s 2.8% was the strongest annual wage growth since June 2009.

    The U.S. labor market has been one of the brightest spots in a long recovery marked by sluggish growth. But even with consistent job creation, a historically large share of Americans have opted out of the workforce and wage gains have remained below prerecession levels.

    The unemployment rate is lower now than it was for every month from October 1973 to November 1997.

  • CWS Market Review – December 2, 2016
    , December 2nd, 2016 at 7:08 am

    “The intelligent investor is a realist who sells to optimists and buys from pessimists.”
    – Jason Zweig

    I hope everyone had a great Thanksgiving. On Wall Street, the market gods appear to be thankful for the “Trump Rally,” which continues to roll on. On Thursday, the Dow Industrials closed at yet another all-time high. Over the summer, I said on CNBC that the Dow could hit 20,000 before the end of the year. Brian Sullivan said he should start calling me, Eddy Elfenbull. Now 20,000 doesn’t seem quite so far away.

    big12022016a

    This is an interesting rally because it’s highly selective. This is an important point investors need to understand. Bonds, for example, have been left behind. During the month of November, the global bond market lost an astounding $1.7 trillion. All across the globe, investors are shifting their assets towards areas of growth. Or perhaps I should say, “towards areas believed to offer prospects for growth.”

    In this issue, I’ll tell you what it all means. I’ll also survey some of the recent economic data. As I’ve been saying, the case for modest optimism for the economy continues to be strong. I’ll also bring you up to speed on our Buy List stocks. Remember that I’ll unveil the 2017 Buy List in three weeks. Before we get to that, let’s look at what’s driving the Trump Rally.

    The Trump Rally Rolls On

    Over a three-week span ending on the Friday following Thanksgiving, the S&P 500 vaulted more than 6.1%. Like the election itself, this was almost completely unexpected. What’s happened is that investors are sharply favoring areas based on robust economic growth. This move is mirrored by a shunning of conservative, income-based assets.

    I’ll give you a good example. Over the summer, the Consumer Staples ETF (XLP) reached an all-time high of $56 per share. I love many consumer-staple stocks (like Hormel Foods), but these are areas that tend to flourish when folks get nervous about the economy. After all, when the economy gets weak, people cut back on vacations, not on soap. On Thursday, the XLP closed at $50.25 per share. That’s a 10% drop in a few months during a largely bullish overall market.

    On the flip side, banks and financial stocks have been doing very well. Since November 4, the Financial Sector ETF (XLF) is up 17.5%. That’s a huge move for less than one month’s work, but it makes perfect sense. Banks love to see a resurgent economy because it means fewer bum loans. It also means wider yield spreads, which is how the banks make ends meet.

    big12022016d

    I always think it’s interesting to look at how small-cap stocks are performing. Smaller companies tend to be skewed toward domestic manufacturers. That’s because there aren’t many small-cap conglomerates. The Russell 2000, which is a small-cap index, rallied for 15 days in a row. From November 3 to 25, the index added 16.5%. I think this is clearly a positive omen for the industrial sector. Sure enough, the recent data confirm this. On Thursday, the ISM Manufacturing Index came in at 53.2, compared to 51.8 for October. Any number above 50 means the factory sector of the economy is growing.

    Perhaps the best economic news we had this week was the Q3 GDP revision. Now I should add that this is a bit of old news since it deals with the third quarter. Still, we learned that the economy grew by 3.2% during Q3. That’s an upward revision of 0.3%, and it means that last quarter was the U.S. economy’s best in two years.

    What about for Q4? That’s hard to say just yet, but we had strong income and spending reports for October. On Wednesday, the government said that personal income rose 0.6% during October. Consumer spending rose by 0.3%, and the figure for September was revised up to 0.7%. The Atlanta Fed now projects that the economy will grow by 2.9% in Q4. Again, I want to be cautious. The economic news is looking better, but we still have a long way to go.

    I also have to mention that surprising OPEC news. Apparently, the oil cartel isn’t dead just yet. The always-bickering members actually agreed on a production cut. I was pretty impressed they were able to do that. Of course, who knows how long it will last, or if the members will abide by it?

    Still, they’re all smiles now, and the price of oil jumped to $51 per barrel. (To be fair, it’s merely back to where it was a few weeks ago.) Energy stocks, in particular, loved the news. From May 2014 to January 2016, the Energy Sector (XLE) dropped in half. It’s now made back about half of what it lost.

    The long end of the bond market has been in rough shape, as yields have climbed steadily higher. In fact, Thursday’s closing yield for some points of the yield curve was the highest in years. The five-year had its highest closing yield (1.90%) since 2011. For the three-year (1.45%), it was the highest since 2010.

    sc12022016c

    Mostly this is a good thing, since it’s shaking money from the bond market, and that money is finding a new home in the stock market. I don’t expect yields to rise too high. The Fed will almost certainly raise interest rates again later this month. After that, they’ll probably hold off for a while. Prices still seem quite tame.

    Overall, this is an ideal time to be a stock investor. The economy is getting stronger. Inflation is low. Rates are only beginning to move higher. The earnings picture is getting much better. My advice to investors is to remain concentrated in a portfolio of high-quality stocks such as those you’ll find on our Buy List. They don’t get much more high-quality than our favorite Spam maker and its amazing dividend streak.

    Hormel Raised Its Dividend for the 51st Year in a Row

    Last week, Hormel Foods (HRL) reported fiscal Q4 earnings of 45 cents per share, which matched Wall Street’s consensus. That’s a nice 22% increase over last, and quarterly revenues rose 9% to $2.63 billion, beating estimates.

    “We had a strong finish to fiscal 2016, achieving record earnings for the fourteenth consecutive quarter,” said Jim Snee, president and chief executive officer. “Three of our five business segments delivered sales, volume, and earnings growth, again demonstrating our balanced business model. Refrigerated Foods and Jennie-O Turkey Store both had excellent quarters, with growth coming from value-added, branded products and improved market conditions. Grocery Products enjoyed a strong quarter aided by the inclusion of the JUSTIN’S® specialty nut butter business in addition to strong results from SPAM® luncheon meat and SKIPPY® peanut butter,” Snee said.

    “Specialty Foods sales declined, primarily due to the divestiture of Diamond Crystal Brands in May, while sales of MUSCLE MILK® protein products were strong,” mentioned Snee. “Specialty Foods earnings decreased primarily due to increased advertising. Our International segment had a tough quarter as the team continues to work through challenging market conditions in China.”

    The Spam maker wrapped up a great year. For 2016, Hormel earned $1.64 per share, compared with $1.32 last year. Hormel also gave 2017 guidance of $1.68 to $1.74 per share. Wall Street had been expecting $1.68 per share.

    Hormel also raised its quarterly dividend by 17% to 17 cents per share. That brings its full-year dividend to 68 cents per share. Based on Thursday’s close, that gives the stock a yield of just over 2%. This is Hormel’s 51st annual dividend increase. That’s one of the longest streaks around.

    Like other consumer staples, Hormel has been a bit weak lately, but that doesn’t concern me. This week, I’m going to lower my Buy Below on Hormel to $37 per share.

    Buy List Updates

    Earlier this week, Elliott Management sent a letter to Cognizant Technology Solutions (CTSH) outlining how the company can boost its stock. Elliott said Cognizant could be between $80 and $90 per share by the end of next year. That’s up from $54 right now. You can read the full letter here.

    For now, I’ll reserve comment on Elliott’s letter. I will note that many of their criticisms strike me as compliments. They think the company too conservative, with too much cash and too little debt. As I read their letter, I kept thinking to myself, “exactly, that’s why I like CTSH!”

    At least the letter gave a nice shot to the share. Cognizant remains a buy up to $57 per share.

    Wabtec (WAB) finally completed its merger with Faiveley Transport. The deal cost $1.7 billion. Faiveley has annual sales of $1.2 billion.

    Raymond T. Betler, Wabtec’s president and chief executive officer, said: “Our combination with Faiveley Transport brings Wabtec many complementary products, a strong presence in the European and Asia Pacific transit industries, and solid relationships with blue-chip, global customers. Together, we will be a more efficient global competitor, with a focus on technology, quality and customer service, and a singular mission: to help customers improve their safety, productivity, and efficiency.”

    Wabtec also updated its guidance. Excluding charges, the company expects to have earnings of $3.95 to $4 per share for 2016. For 2017, WAB expects earnings growth of 8%, excluding charges. Wabtec is a good example of a good company that’s operating well in a terrible environment. I still like this stock a lot. I’m lifting my Buy Below on Wabtec to $90 per share.

    Shares of Ford Motor (F) jumped nearly 4% on Thursday after a good sales report for November. At one point, Ford was up 7% on the day. The automaker saw its sales rise 5.2% last month. Ford sold 197,574 vehicles, including more than 72,00 trucks. Higher oil prices could help Ford since the shift to aluminum bodies was designed to be more fuel efficient. Ford remains a buy up to $13 per share.

    We only have two Buy List earnings reports this month. HEICO (HEI) is due to report on December 13. Bed Bath & Beyond (BBBY) will report on December 21.

    That’s all for now. The November jobs report is due out later this morning, but it won’t have any impact on the Fed’s plans for later this month. Next week will be fairly quiet as far as economic reports are concerned. The productivity report comes out on Tuesday. Consumer credit is on Wednesday. Perhaps the biggest news next week will be the European Central Bank meeting on December 8. The ECB will decide on more stimulus. A lot of folks will be watching this closely. 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

    P.S. Here’s a video of my appearance on CNBC’s “Halftime Report.”

  • Morning News: December 2, 2016
    , December 2nd, 2016 at 7:04 am

    Russia Says Foreign Spy Agencies Preparing Cyberattacks on Banks

    Offshore Yuan Heads for Best Week Since January as Rates Climb

    Italian Assets Show Little Panic Before Vote

    With Presidency in Play, Can France Embrace Economic Change?

    Brazil’s Braskem Close to Leniency Deal in U.S., Brazil

    Trump Threatens ‘Consequences’ For U.S. Firms That Relocate Offshore

    Fed May Face Unnerving Shake-Up Under Trump Administration

    Aixtron Tumbles as Obama Said Poised to Block Chinese Takeover

    Howard Schultz Stepping Down As Starbucks CEO

    Wells Fargo to Keep Commissions-Based Retirement Accounts Under Fiduciary Rule

    `Never Say Never’: Why A Beloved Silicon Valley Website Sold For $20 Million

    Johnson & Johnson Just Got Hit With a $1 Billion Verdict Over Faulty Hip Implants

    A Few Billionaires Are Turning Medical Philanthropy on Its Head

    Jeff Miller: Stock Exchange: Model Picks Teach Us to Manage Risk

    Cullen Roche: Why The US Government Should NOT Refinance the National Debt with Longer Bonds

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  • The Rotation to Cyclicals Continues
    , December 1st, 2016 at 2:50 pm

    The market is still digesting the OPEC news. Banks and energy stocks are up today while tech and income stocks are down. If you recall the “Elfenbein Theory to Explain the Entire Stock Market,” today is a classic Quadrant I & II day.

    image1473

    Bonds are doing poorly and stocks are rotating to cyclical areas.

    Ford reported that November was a good month for sales:

    Ford’s sales increased 5.2% for the month to 197,574 vehicles, easily beating expectations. That included a 10% increase in retail sales, bolstering the bottom line. The company’s flagship Ford brand was up 4.6%. Its luxury Lincoln brand continued its hot streak, rising 19.1%.

    This morning, we also learned that the ISM Manufacturing Index rose to 53.2 last month from 51.9 in October.

  • Morning News: December 1, 2016
    , December 1st, 2016 at 6:57 am

    Global Bonds Suffer Worst Monthly Meltdown as $1.7 Trillion Lost

    Euro-Area Manufacturing Picks Up as Weaker Euro Bolsters Exports

    Eurozone Unemployment Lowest Since Mid 2009

    China Stands to Gain From OPEC Deal

    China’s New Tax Could Hurt Ferrari, Aston Martin, and Rolls-Royce

    Delinquencies Rise on Growing Volume of Subprime Auto Loans

    Wall Street Wins Again as Trump Picks Bankers, Billionaires

    Trump’s Treasury Pick Says US Should Get Out of Freddie Mac and Fannie Mae

    How Trump Plans to Keep Jobs in America: Pressure and Promises

    Court Rules IRS Can Seek Information on Bitcoin Customers

    Though Awash in Fakes, China Rethinks Counterfeit Hunters

    Netflix Allows Subscribers to Binge-Watch Shows Offline

    ChemChina Setting Up $5 Billion Fund to Help Finance Syngenta Bid

    Josh Brown: “The Best People”

    Jeff Carter: If You Are A Bitcoin Developer, Don’t Walk, Run To Chicago

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