Archive for June, 2017

• Morning News: June 12, 2017
  Eddy Elfenbein, June 12th, 2017 at 6:53 am

  Preparing for `Brexit,’ Britons Face Economic Pinch at Home

  This Guy Is Trying to Cure Hong Kong’s Meat Addiction

  Tech Selloff Spreads After Friday’s Rout

  America’s Stubborn Oil-Supply Glut Catches Funds Off Guard

  Apple Is Making Old iPhones New Again to Win India

  German Grocery Chain Aldi to Invest $3.4 Billion to Expand U.S. Stores

  Culture Clash at a Chinese-Owned Plant in Ohio

  JLR Unit Invests $25 Million in Lyft to Help Develop Self-Driving Cars

  Uber Board Adopts All Recommendations From Eric Holder Investigation

  Uber Weighs Leave of Absence for Chief Executive

  Musk’s SpaceX Joins the Military

  Fujifilm-Xerox Venture Ousts Executives Over Accounting Trouble

  Takata Recommends Re-Electing Board as Search For Rescue Deal Drags On

  Cullen Roche: Your Best Investment

  Jeff Miller: Is It Time For New Leadership?

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• CWS Market Review – June 9, 2017
  Eddy Elfenbein, June 9th, 2017 at 5:08 am

  “It’s human nature to find patterns where there are none and to find skill where luck is a more likely explanation.” – William Bernstein

  Next week is the big Federal Reserve meeting. Wall Street has already convinced itself that the central bank will again raise interest rates. I’m afraid they’re right. As I’ve said for the past few weeks, I think a rate hike now is a mistake. How big of a mistake is still to be determined. In this issue, I’ll discuss what the Fed’s move means for us and our portfolios.

  The good news for us is that the low-volatility rally continues to roll on. In the last 15 trading sessions, the S&P 500 has risen 11 times. The index’s single biggest decline was a mere 0.28% drop. That’s barely a nick. Here’s a great stat I saw from Callie Bost. She noted that since 1990, there have been 15 trading days where the difference between the daily high and low was less than 0.28%. Four of those have come in the last month.

  

  There seems to be an odd paradox. The world appears to grow more volatile while the stock market grows more serene. Or, perhaps this isn’t the paradox it seems. Maybe investors are retreating from news of terrorism and missile tests for the relative comfort of stock investing. Whatever the cause, my top concern is an overly zealous Federal Reserve that looks to contain inflation, which is hardly a problem.

  We got a nice earnings report this week from JM Smucker. The jelly people handily beat Wall Street’s estimates thanks to cost-cutting. I’ll have all the details in a bit. I’ll also give you some updates on our Buy List. But first, let’s look at the rate hike that’s almost certainly coming our way next week.

  Get Ready for a Fed Rate Hike

  On Tuesday and Wednesday of next week, the Federal Reserve gets together for another policy meeting. The two-day affair usually gets a lot of attention because it’s followed by a press conference from Fed Chairwoman Janet Yellen.

  Much of Wall Street has this meeting circled on their calendars. They figure that if the Fed is going to strike, it’ll do it in June. At this two-day meeting, the Fed also updates its economic projections. These are more often referred to as “the blue dots” in honor of the Fed’s scatter plots.

  Earlier this year, the consensus on the Fed was that it would raise interest rates three times this year plus three more times in 2018 and 2019. I thought this was nuts. I reassured readers that the Fed always starts out sounding as hawkish as it can but then gradually gives way. This time, it hasn’t.

  During this cycle, the Fed first raised rates in December 2015. They followed that up with another raise in December 2016, and again in March 2017. Traders in the futures market think there’s a 93.5% chance that the Fed will hike next week. If they’re right, that would move the target for the Fed funds rates from 1% to 1.25%.

  What about after that? Traders see the Fed standing pat for a few months. I think that’s right. But by the December meeting, another rate hike is in play. Right now, the odds are very nearly even money for a December hike.

  I’ll briefly restate my opposition. The Fed should only move once there are signs that inflation is heating up. Those signs aren’t here yet. The commodity markets aren’t rallying. Oil has been falling lately. The latest CPI reports have been very tame. We’ll get the May CPI report on Wednesday, the morning of the Fed’s announcement.

  Last week’s employment report was not terribly strong. The U.S. economy created just 138,000 net new jobs. Economists had been expecting 185,000. The numbers for March and April were revised lower. The growth in wages is actually decelerating slightly. The yearly growth number fell from 2.51% in April to 2.46% for May.

  I don’t want to sound overly alarmist. There have been improvements in the economy. The last earnings season was quite decent. But as far as interest rates go, I think the Fed needs more time. I’m particularly concerned to see long-term interest fall. After the election, long-term yields soared on the prospects of greater economic growth. To be fair, yields at the long end had been rising since the summer.

  We heard a lot about the Trump Trade, but that started to unravel in December. Three months ago, the 10-year Treasury was yielding over 2.6%. Lately, it’s gotten close to 2.1%. If the Fed follows through with its rate hike, the famous Two/Ten Spread will probably fall below 70 basis points. That would be a nine-year low. That’s still not in the danger zone, which is 0.00, but it’s getting close. The hidden story here is that the Fed’s “ceiling” for rate increases is probably a lot lower than folks want to admit.

  What effect will the Fed have? Higher short-term rates would come as a relief to many financial stocks. In fact, we saw a nice bounce in Signature Bank (SBNY) on Thursday. At the opposite end, dividend stocks will lose some of their luster. A stock that yields 3% is a wonderful thing in a 0% interest rate world. It becomes gradually less impressive as interest rates climb higher. Now let’s look at our most recent Buy List earnings report.

  Smucker Beats Earnings Thanks to Cost-Cutting

  On Thursday morning, JM Smucker (SJM) reported fiscal Q4 earnings of $1.80 per share. That was eight cents more than expectations. For the whole fiscal year (ending in April), Smucker made $7.72 per share. Their previous guidance had been for $7.60 to $7.70 per share. In February, the company lowered the top end of its full-year forecast by five cents per share. As it turned out, the original guidance was pretty close to the mark.

  “In fiscal 2017, we grew adjusted EPS by 7 percent over the prior year,” said Mark Smucker, Chief Executive Officer. “In the new fiscal year, we continue to execute our strategic plan for sustainable, long-term growth by capitalizing on changes in consumer preferences and the retail environment. We will fuel the momentum of our growth brands like Smucker’s® Uncrustables®, Nature’s Recipe®, and Café Bustelo®, while supporting our base businesses in coffee, peanut butter, pet food, and pet snacks. Accelerated cost savings and expanded capabilities are key components of our multi-dimensional strategy to deliver top- and bottom-line growth and increase shareholder value.”

  Now for guidance. For fiscal 2018, Smucker said they expect earnings to range between $7.85 and $8.05 per share. That’s pretty good. Wall Street had been expecting $7.93 per share. They also said they expect net sales to rise by 1%. SJM pegs this year’s free cash flow at $775 million and capital expenditures at $310 million.

  This was a good quarter for Smucker, but a lot of the earnings beat was thanks to cost-cutting. Don’t get me wrong—that still counts, but I would have liked to see more top-line growth. You can only cut costs so much.

  The shares of SJM gapped up more than 2% at the open, but that didn’t last. By the closing bell, SJM closed at $128.51, for a loss of 1.81%. I should add that there’s a remote possibility that someone big will come along and try to buy SJM out. Smucker remains a buy up to $128 per share.

  This earnings report will be our only Buy List earnings report until Q2 earnings season gets going in another five weeks. One outlier is RPM International (RPM). The company ended its fiscal year in May, but it won’t report its Q4 earnings until late July. Now let’s look at some recent news from our Buy List stocks.

  Buy List Updates

  We’re coming up on the midpoint of the year. In early July, I’ll have a more thorough breakdown of our Buy List’s first-half performance, but for now, I can say that it’s shaping up to be a pretty decent year for us.

  Through Thursday, our Buy List is up 10.43% for the year, while the S&P 500 is up by 8.71%. Those numbers don’t include dividends (the Buy List yields a bit less than the S&P 500, but it’s not very much). I’ll include the dividend numbers in our first-half summary.

  Our best performer on the year is Cerner (CERN), which is up by 43.78%. Second place is CR Bard (BCR), with a gain of 39.71%. We now have 11 Buy List stocks that are up more than 13% on the year. Six of our stocks are in the red. The biggest loser is Express Scripts (ESRX), which is down 12.25%.

  This week, Sherwin-Williams (SHW) finally completed its $11.3 billion acquisition of Valspar. The deal was first announced 15 months ago. The problem was clearing some of the anti-trust hurdles. This is where another one of our Buy List stocks, Axalta Coating Systems (AXTA), came to the rescue. The companies decided to sell off Valspar’s North American Industrial Wood Coatings to Axalta for $420 million in cash. The regulators were cool with that, and it was a done deal.

  The combined company will have revenues of about $16 billion. Sherwin said they’ll announce their Q2 earnings on July 20. At that time, they’ll provide guidance for the combined company for Q3 and all of 2017. This week, I’m lifting my Buy Below on Sherwin-Williams to $350 per share.

  Intercontinental Exchange (ICE), is holding its first analyst day today, and the stock has been rallying, perhaps in anticipation. This is a good time for ICE to explain itself to the world, because too many investors see ICE as simply a trade-volume based business. In reality, ICE is becoming more dependent on data sales and technology fees. The company, for example, recently bought Bank of America’s index platform. Barron’s rightly said that Intercontinental Exchange is “misunderstood, underappreciated and underowned.” This week, I’m raising my Buy Below on ICE to $66 per share.

  Earlier I mentioned that CR Bard (BCR) is our second-biggest gainer this year. As I’m sure you recall, Bard is in the process of being bought out by Becton, Dickinson (BDX). The deal calls for BCR shareholders to get $222.93 per share in cash plus 0.5077 shares of BDX.

  The good news is that shares of BDX have been rallying. They’re even higher now than when the deal was announced in April. Going by Thursday’s close, Bard is valued at $320.32 per share. Bard’s actual shares are going for 2% below that. That’s quite natural since there’s a chance the deal could fall apart. I doubt it will happen, but we have to aware of the possibility.

  The sizable cash portion of the deal protects Bard shareholders from large swings in BDX’s share price. It’s a relief to see that the market hasn’t turned against BDX for proposing such a large deal. The deal is expected to close this fall. If all goes well, you can expect to see that 2% discount for Bard gradually close.

  That’s all for now. The big news next week will be the Federal Reserve meeting on Tuesday and Wednesday. The Fed’s decision will come out at 2 p.m. Wednesday afternoon, and it will be followed by a press conference by Fed Chairwoman Janet Yellen. The Fed will also update its economic projections (i.e. the “blue dots”). That morning, we’ll also get the CPI report for May. I doubt we had much in the way of inflation last month. 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: June 9, 2017
  Eddy Elfenbein, June 9th, 2017 at 5:07 am

  Dollar Cleans Up as UK Election Shocks Sterling

  Treasuries-Bund Trade Is About to Get Interesting

  House Votes to Roll Back Post-2008 Financial Rules

  Labor Department’s Fiduciary Rule Takes Effect

  SoftBank to Buy Boston Dynamics, Maker of Animal-Like Robots

  Verizon’s Oath Isn’t a Big Threat to Google and Facebook, but It Can Still Pay Off

  Alibaba Adds $42 Billion in Market Cap on Strong Sales Forecast

  Valeant: Another Divestiture At A Fair Price, Situation Remains Uncertain But Not Hopeless

  Initial Claims, Unemployment Claims, Remain At US Historical Lows

  Not So Fast: Pandora Puts KKR Investment On Hold

  Pandora Has Reportedly Closed a Minority Investment Deal With Sirius XM

  Matt Zames to Leave JPMorgan Chase, Seeking to Run His Own Business

  Saks Owner Hudson’s Bay to Cut 2,000 Jobs as Loss Widens More Than Expected

  Joshua Brown: The Most Important 24 Minutes of Your Year

  Jeff Miller: Stock Exchange: Buy the Dip (VOYA) or Buy the RIP (DPZ)?

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• Morning News: June 8, 2017
  Eddy Elfenbein, June 8th, 2017 at 6:50 am

  Digging the Graveyard of Oil’s Past

  China May Imports, Exports Unexpectedly Speed Up But Seen Fading

  Tokyo Nights May Soon Be Lit Up by a Country 1,700 Miles Away

  European Central Bank Meeting Focuses on `Forward Guidance’

  Rising Industry Output Points To German Economic Upswing

  House Poised to Pass Bill Taking Aim at Dodd-Frank Regulations

  Senators Challenge Trump Plan to Privatize Air Traffic Control

  ‘Prime Is The Gateway Drug’: Amazon’s Most Puzzling Move Yet Could Be One Of Its Most Brilliant

  Boeing Barrels Ahead on 787 and 777 Cost Reductions

  Toshiba Shares Up After Sources Say It Aims to Name Chip Ops Buyer on June 15

  Traders Are Cranking Up Their Bets Against Snap

  No One Has Ever Made a Corruption Machine Like This One

  Howard Lindzon: The Airling Index and 9/11

  Michael Batnick: Satisfaction Yield

  Ben Carlson: The Pension Fund Private Equity Hail Mary

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• Morning News: June 7, 2017
  Eddy Elfenbein, June 7th, 2017 at 7:10 am

  OECD Warns Protectionist Rhetoric Undermining Investment Rebound

  Spain’s Santander Rescues Banco Popular From Collapse

  Oil Drops as Industry Data Shows Surge in U.S. Gasoline Supplies

  The Head of the U.S. Patent Office Has Abruptly Resigned

  Forced Finally To A Binary Labor Interpretation

  U.S. Justice Department Opposes Wells Fargo on Whistle-Blower Suit

  Electric Car Sales Are Surging, IEA Reports

  When Companies Lead on Infrastructure, Taxpayers Often Bear the Costs

  Developers Lure Buyers to Cities, Even as Prices Stall

  Goldman Sachs Boost Rates For Savers In Bid To Attract Deposits

  Pinterest Raises Valuation to $12.3 Billion With New Funding

  Uber Fires 20 Amid Investigation Into Workplace Culture

  Dish Is Fined $280 Million After Its Telemarketers Called People On ‘Do Not Call’ List

  Michael Batnick: Greatest Hits From Michael Mauboussin & Meir Statman

  Cullen Roche: 1,000 Years Worth of Market Data

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• Morning News: June 6, 2017
  Eddy Elfenbein, June 6th, 2017 at 6:30 am

  The World’s $100 Trillion Question: Why Is Inflation So Low?

  U.S. Extends Sugar Talks With Mexico as Both Countries Near Deal

  White House Formally Backs Plan To Transfer Air Traffic Control System To Private Corporation

  Supreme Court Disgorges the SEC

  Trump’s Paris Pull-Out Can’t Stop The Renewables Revolution

  Trump Organization to Go Budget Friendly With `American Idea’ Hotel Chain

  Amazon Offers Prime Discount To Those On Government Benefits

  Hedge Fund Guys Think They’re Smart. Let’s See.

  J.Crew’s Mickey Drexler Confesses: I Underestimated How Tech Would Upend Retail

  Alphabet Shares Follow in Amazon’s Footsteps and Top $1,000

  The Video Game Business Is Finally Adopting The Netflix Model

  Led by Rachel Maddow, MSNBC Surges to Unfamiliar Spot: No. 1 in Prime Time

  Josh Brown: QOTD: You Will Always Find What You Need

  Roger Nusbaum: We’ll Always Have Paris

  Jeff Carter: One Bad Pitch Doesn’t Mean The End

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• Morning News: June 5, 2017
  Eddy Elfenbein, June 5th, 2017 at 7:00 am

  Saudi-Led Alliance Cuts Ties With Qatar

  World Bank Still Sees Global Growth Picking Up Amid Policy Risks

  JPMorgan’s Dimon Aiming for China Venture With Full Control

  Solar Energy Boom Turns to Bust for Indian Manufacturers

  The Bloody Fight for ETF Scraps Is About to Get Even Worse

  Toyota Sold All Its Tesla Stock, And Plans To Ignite 2020 Games By Flying Car

  Uber’s Surge Pricing Tactic During London Bridge Terror Attack Ignites Social Media Outrage

  G.M. Wants to Drive the Future of Cars That Drive Themselves

  Apple Services Unlikely To Offset Soft iPhone Sales

  Apple Piles On the Features, and Users Say `Enough!’

  Herbalife: Approaching Record Highs, But Should It Be?

  Oculus Founder Plots a Comeback With a Virtual Border Wall

  Blackstone Offers $2 Billion for Finnish Real Estate Firm Sponda

  Jeff Miller: Is the Bond Market Sending a Message for Stocks?

  Michael Batnick: These Are The Goods

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• My NFP +138,000
  Eddy Elfenbein, June 2nd, 2017 at 8:32 am

  The May jobs report is out. The U.S. economy created 138,000 net new jobs last month. The unemployment rate is down to 4.3%.

  The numbers for March and April were revised lower. March by 29,000 and April by 66,000.

  The unemployment rate is now at its lowest since March 2001. The unemployment rate is lower now than at any time from March 1970 to Feb 1999.

• Morning News: June 2, 2017
  Eddy Elfenbein, June 2nd, 2017 at 7:12 am

  Brazil Exits Recession With Fastest Growth Rate Since 2013

  Trump’s Paris Exit Leaves Him Isolated From C-Suites to Capitals

  Oil Slides as U.S. Climate Withdrawal Compounds Glut Concerns

  Mnuchin and Mulvaney at Odds as Trump Confronts Debt Default

  Dollar Gains as ADP Suggests Strength Before May Jobs Report

  Trump Talks Tough on Trade, But His Team Is Treading Lightly

  Goldman Sachs Applies for Saudi Equities Trading License

  Walmart is Asking Employees to Deliver Packages on Their Way Home From Work

  Uber’s CFO Search May Prove Difficult

  British Airways I.T. Outage Caused By Contractor Who Switched Off Power

  Blue Apron, a Meal Delivery Service, Files for Public Offering

  Linde Shares Seen Up After Boards Agree Praxair Merger

  The Doughnut Dilemma: What The Office Pastry Teaches About Behavioral Economics

  Howard Lindzon: Nasdaq 10,000 and What Could Go Wrong?

  Jeff Miller: How to Deal With a Losing Trade

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• Update from Manila
  Eddy Elfenbein, June 1st, 2017 at 4:08 pm

  I decided to head off to the Philippines for a few days of vacation. By now, you’ve probably heard of the awful attack at Resorts World Manila. That’s a big complex right next to the airport which is about five miles from where I am. Let me assure you that I’m safe and sound. I didn’t even know about the attack until I heard about it on Twitter.

  The island of Mindanao in the southern Philippines has been under attack from ISIS. Manila is a long way from there but it seems ISIS wants to cause as much mayhem as possible.

  Posting will be light but I wanted to let everyone know that I’m doing fine.