Archive for November, 2017

• Me on the Bespokecast
  Eddy Elfenbein, November 30th, 2017 at 5:20 pm

  George Parkes was nice enough to invite me on the latest Bespokecast.

• Barron’s: “Does Express Scripts Clean Up Nicely?”
  Eddy Elfenbein, November 30th, 2017 at 12:31 pm

  From Barron’s:

  Shares of pharmacy benefit manager Express Scripts (ESRX) are up about 4% since last week, as the company reiterated its desire to adapt to healthcare industry upheavals.

  On CNBC this morning, the PBM’s chief executive Tim Wentworth said he’d be happy to partner with a health insurer or with Amazon.com (AMZN), if that e-commerce giant jumped into the pharmacy business.

  (…)

  On Monday, Express Scripts announced a move that will get it out from under one of the clouds hanging over its business practices. It agreed to sell its United BioSource business to the New York private equity firm Avista Capital Partners, for an undisclosed sum. Drug makers hire United BioSource to facilitate prescriptions for high-priced drugs — an activity that appeared to conflict with Express Scripts’ cost-containment mission. United BioSource was named in a price-fixing class action suit last month, as well as a whistleblower suit that alleged it helped defraud government health plans (“Two Lawsuits Hit Express Scripts Unit on Pricing,” November 15, 2017). Express Scripts and its co-defendants denied the allegations in both suits. Concerns about United BioSource’s activities were first reported in Barron’s (“Express Scripts Unit’s Connection to High Priced Specialty Drugs,” November 21, 2015).

• Morning News: November 30, 2017
  Eddy Elfenbein, November 30th, 2017 at 7:04 am

  OPEC Signals Oil Supply Cuts Will Be Extended Until End of 2018

  Europe’s Bond Investors Are Cruising for a Bruising

  U.S. Joins Europe in Fighting China’s Future in W.T.O.

  Agreeing to Misconduct Probe, Australian Banks Seek to Cut Risk

  Fed Reports Economic Gains, Strengthening Price Pressures

  FCC Chairman Pai Defends His Attack on Net Neutrality by Substituting Ideology for History

  Bitcoin’s Price Swings Have Been Especially Crazy in the Last 24 Hours. Here’s Why

  This Is What Could Pop the Bitcoin Bubble

  Uber Lawyer Says Ex-Employee’s Payout Was an ‘Extortionist’ Move; Judge Disagrees

  AT&T-Time Warner Will Close; Time Warner Is Valuable Regardless

  Amazon Trumpets Its Cloud Lead With N.F.L. and Other Deals

  Sears Comp Sales Continue to Fall In Line with Forecast

  Roger Nusbaum: The ETF ETF

  Josh Brown: Tales From The Crypt

  Cullen Roche: How Will the Bitcoin Mania End?

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• Good Day for Us
  Eddy Elfenbein, November 29th, 2017 at 4:31 pm

  Today was a good day for our Buy List. Our Buy List gained 0.71% while the S&P 500 lost 0.04%.

  Of course, we get bad days as well, and I like to take each day with a grain of salt. Around here, we’re always focused on the long run.

  Still, we’re human and it’s nice to see us do well. In fact, we’ve been in a bit of a hot streak lately. We’ve outperformed the S&P 500 10 times in the last 13 days. All three underperforming days were quite modest.

  For the year, we’re now up 19.40% compared with 17.30% for the S&P 500 (not including dividends).

  Here’s how each of our 25 stocks did today. You’ll notice that several really creamed the market.

  Symbol	Gain/Loss
  ROST	4.31%
  HRL	4.05%
  ADS	3.37%
  AXTA	3.33%
  SBNY	3.25%
  WAB	2.86%
  SJM	2.38%
  ESRX	2.31%
  CNK	2.24%
  SNA	1.92%
  AFL	1.07%
  RPM	0.74%
  ICE	0.65%
  INGR	0.49%
  FISV	0.24%
  BCR	0.11%
  CERN	0.03%
  CBPX	-0.18%
  DHR	-0.40%
  MCO	-0.69%
  SHW	-0.90%
  CTSH	-1.04%
  SYK	-1.08%
  MSFT	-1.81%
  HEI	-3.16%

  What made today’s trading interesting was the wide divergence between sectors. For example, the S&P 500 Financials were up 1.77% today while the S&P 500 Techs were down -2.56%.

  The Dow Jones Transports gained 3.30% today to close over 10,000 while the Nasdaq lost -1.27%. The Nasdaq 100 lost -1.73%. We haven’t seen that kind of divergence in awhile.

  The small-cap Russell 2000 rose 0.38% while the mega-cap S&P 100 fell -0.03%.

  The S&P 500 Value Index rose 0.86% and the S&P 500 Growth Index fell -0.73%.

• Express Scripts and Axalta News
  Eddy Elfenbein, November 29th, 2017 at 10:12 am

  From Forbes:

  Humana has been cutting costs, employees and selling non-core assets as rivals in the health and drug benefit management business clean up their balance sheets for possible sale. Others shedding non-core assets include Aetna, which announced plans to sell its group life insurance business and Express Scripts, which this week said it would sell a pharmaceutical support services business to a private equity firm.

  (…)

  Meanwhile, other healthcare concerns are taking steps to be more nimble should the buyout wave continue. Express Scripts on Monday said it has signed a deal to sell its pharmaceutical support business, United BioSource Corporation, to private equity firm Avista Capital Partners for an undisclosed amount.

  Express Scripts and its standalone business model are under pressure as rivals form closer ties with health insurers. UnitedHealth Group has its OptumRx PBM under the larger insurer’s umbrella and, of course, there’s the rumored Aetna sale to CVS Health, which operates the large Caremark PBM.

  From Benzinga, an analyst says Axalta could fetch $40 to $45 per share.

  KeyBanc Capital Markets analyst Michael Sison discussed the M&A possibilities in a Monday note, reiterated his Overweight rating on shares of Axalta and upped his price target from $36 to $40.

  The analyst attributed the price target revision to the takeover potential following Nippon Paint’s interest in Axalta.

  The Thesis

  The price range needed to clinch a deal would be 13-15 times P/EBITDA or $40-$45, Sison said.

  Antitrust isn’t likely to a big issue in the combination of the No. 4 and No. 5 companies in the industry, the analyst said.

  The analyst estimates about 12 percent year-over-year EBITDA growth for Axalta in 2018, with 40 percent coming from organic initiatives and a lack of hurricane and customer issues at Refinish.

  “We believe pricing will catch up to offset higher raw materials costs experienced in 2017.”

  Following 2017’s negative pricing and flattish organic growth performance, Sison said he expects the transportation coating business to rebound in 2018. Axalta’s top-line is projected to grow in the mid-single digits and EBITDA is expected to grow near double-digits as further cost savings initiatives help margins expand by 110 basis points, Sison said.

  For the performance coatings segment, KeyBanc sees mid-teens growth in EBITDA, thanks to acquisitions and a more normalized refinish product mix. A 110 basis-point improvement in EBITDA margins is also expected, Sison said.

  The Price Action

  After Axalta confirmed it’s in discussions with Nippon Paint for over $8.25 billion following the breakdown of its merger talks with Akzo Nobel, the shares of the company rallied about 5 percent Nov. 22.

  The shares are up about 31 percent year-to-date.

• Q3 GDP Revised up to 3.3%
  Eddy Elfenbein, November 29th, 2017 at 10:06 am

  This morning, the government revised its estimate for Q3 GDP up to 3.3% from the initial estimate of 3.0%. Q2 grew by 3.1% so we’ve now had back-to-back quarters of more than 3% growth.

  Can we make it three in a row? Maybe. The Atlanta Fed’s forecast for Q4 is now at 3.4%. We won’t see the government’s first report on Q4 until late January.

• Morning News: November 29, 2017
  Eddy Elfenbein, November 29th, 2017 at 7:00 am

  ECB Says Low Interest Rates Aid Debt Resilience But Risks Remain

  Bitcoin Futures Draw Push Back, Not Stop Light From Market Cops

  The Internet is Dying. Repealing Net Neutrality Hastens That Death.

  Robots Are Coming for Jobs of as Many as 800 Million Worldwide

  Trump Starts Probe Into Aluminum That China Calls Protectionist

  Trump’s Tax Promises Undercut by CEO Plans to Reward Investors

  Jerome Powell Shows Mastery of Central Bank Arts

  AT&T Responds to Justice Department Lawsuit

  Rebuking Uber Lawyers, Judge Delays Trade Secrets Trial

  Uber’s Q3 Loss Widens as SoftBank Makes First Offer on Shares

  What We Learned From Retailers’ Five-Day Scramble for Shoppers

  Daimler Rebuffs Geely Offer to Buy Stake; Geely Still Hopeful of a Deal

  Michael Batnick: This Is Not Normal

  Jeff Carter: Can You Short Bitcoin?

  Howard Lindzon: Who Do You Trust?… and Live Light and Mobile

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• The Decline in the Natural Interest Rate
  Eddy Elfenbein, November 28th, 2017 at 1:10 pm

  I’ve written before about the natural interest rate. This is the idea that there’s a magic real interest rate that hangs over the entire globe. When the Fed goes below it, it’s pumping up the economy. When it goes above, it’s pulling the economy back.

  The problem is that we never know exactly where the natural rate is. There are, however, some clues. Although we can’t see it, we can see its effects.

  Mind you, there are plenty of economists who think all this is for the birds. But John Williams, top dog at the San Francisco Fed, takes it very seriously. He believes that since the recession, the natural rate has plunged, and I’m inclined to agree.

  Williams and Thomas Laubach have teamed up to — what else do economists do — make a model of natural rates. Here’s a link to their paper on the subject. Here’s a spreadsheet of their data.

  Remember that the natural rate is a real interest rate, meaning adjusted for inflation. I took the data from Williams and Laubach and added the real Fed fund rate. I based mine on core inflation which I think shows the trends better, though I understand some may disagree.

  

  Notice how sharply the red line has plunged since 2008. If that’s right, that means the Fed hasn’t been pushing the economy as hard as you might think. The chart also shows just how aggressive Alan Greenspan was in the period after 9/11. He took the blue line well below the red line. Finally, you can see that the Fed is close to being neutral (meaning, red and blue are the same).

• The Fed’s Window Is Closing
  Eddy Elfenbein, November 28th, 2017 at 11:27 am

  I’m watching Jay Powell testify before Congress on his nomination for Fed chair. It appears to be smooth sailing.

  Speaking of which, here’s another version of a chart I often discuss. This shows the two components of the 2/10 spread. It’s the two-year and ten-year Treasury on the same scale. Notice how quickly they’re converging.

  

  According to the futures market, there’s a 92.8% chance the Fed will raise rates in two weeks. The only dissenting forecast calls for two rate hikes.

  The futures market sees another hike in coming in March, although that view is at 50.1%. A hike by June is at 74.8%.

  The odds are just slightly against a third hike by November. That means there’s a chance that the 2/10 could invert before the end of 2018.

• Consumer Confidence Remains at 17-Year High
  Eddy Elfenbein, November 28th, 2017 at 10:34 am

  Yesterday, we learned that new home sales rose to a 10-year high. Today we learned that consumer confidence is still at a 17-year high.

  A measure of U.S. consumer confidence rose again in November, hitting yet another 17-year high.

  The Conference Board on Tuesday said its index of U.S. consumer confidence increased to 129.5 in November from 126.2 in October. Economists surveyed by The Wall Street Journal had expected a November reading of 124.0.

  “”Consumers’ assessment of current conditions improved moderately, while their expectations regarding the short-term outlook improved more so, driven primarily by optimism of further improvements in the labor market,” said Lynn Franco, Director of Economic Indicators at The Conference Board. “Consumers are entering the holiday season in very high spirits and foresee the economy expanding at a healthy pace into the early months of 2018.”