Archive for September, 2018

• Retail Sales and Industrial Production
  Eddy Elfenbein, September 14th, 2018 at 1:08 pm

  We got two more economic reports today. First, the Fed said that industrial production rose by 0.4% in August. That matched consensus.

  Here’s IP since the beginning of 2012. Notice the sharp downturn from late 2015 into early 2016. A lot of that was driven by the oil bust.

  The last twelve months have been very good. IP is up nearly 5% which is an eight-year high. Contrast that with 2015 when IP fell by 4%.

  The retail sales report showed a 0.1% increase for August. Excluding gasoline, retail sales fell 0.1% last month. In the last year, retail sales were up 6.6%, and excluding gasoline, they were up 5.6%.

• JP Morgan Warns on WAB/GE Deal
  Eddy Elfenbein, September 14th, 2018 at 12:08 pm

  Shares of Wabtec (WAB) are down about 9% today. JP Morgan has warned that cash flow from the deal could trail estimates.

• CWS Market Review – September 14, 2018
  Eddy Elfenbein, September 14th, 2018 at 7:08 am

  “A lot of people with high IQs are terrible investors because they’ve got terrible temperaments. You need to keep raw, irrational emotion under control.”
  – Charlie Munger

  On Thursday, our Buy List broke the double-digit barrier. We’re now up 10.41% for 2018 (not including dividends). So far this year, sixteen of our 25 stocks are beating the S&P 500. Here’s something to consider. In this day of tech media giants, our two best performers this year are a freight-services company and a wallboard company. Boring, sure, but we’ll take those gains any day.

  In this week’s CWS Market Review, I want to cover some recent economic news, including last week’s jobs report and this week’s subdued inflation report. I also want to touch on an overlooked issue which is the spreading chaos in emerging markets. This isn’t getting the attention it deserves. I’ll also cover some recent news impacting our Buy List. (BTW, have you noticed the big rally in Snap-on? Up 30% since May!) But first, let’s take a closer look at the August jobs report.

  The “Raise-Less” Recovery

  Last Friday, the government reported that the U.S. economy created 201,000 net new jobs in August. That’s basically in line with the current trend. Over the last seven years, the economy has created 17.3 million new jobs. That’s an average of 205,000 per month. Officially, the unemployment rate is 3.9%. The current unemployment rate is lower than it was in every single month during the 1960s, 1970s and 1980s.

  While that’s good news, there are some weak spots to note. Not as many Americans are in the workforce as there were a few years ago (although this trend isn’t as bad as some alarmists would lead you to believe). This trend may soon change. This week’s report on job openings was an all-time record. There were 6.9 million job openings in July. That’s the highest since the data series started in 2000. Another report from small businesses showed that more companies are having trouble finding new workers, and Thursday’s initial jobless claims report was another 49-year low.

  The other weak spot in the economy is wages. You would think that with emerging labor shortages there would be an increase in worker pay. While there’s been some improvement there, it’s not much to celebrate. In the last year, average hourly earnings are up 2.9%. The last economic recovery was described as a “jobless” recovery. This one seems to be a “raise-less” recovery.

  Here’s the growth of wages in blue just narrowly beating out core inflation in red:

  

  As investors, wage growth is important to us because that’s where future business revenue comes from. We want to see more shoppers. This leads us to the issue of inflation. With subdued wages, there hasn’t been much pressure on consumer prices. On Thursday, Wall Street had been expecting the August CPI report to show an increase of 0.3%. Instead, it came in at 0.2%. In the last year, inflation is running at 2.7%. The number is a bit skewed because inflation ran slightly hot in late 2017. Over the last six months, inflation is running just under 1%. Expect to see that 2.7% number trend lower over the next few months.

  I also like to look at the inflation report for “core prices” which excludes food and energy prices. In August, core inflation rose by just 0.08%. That’s the second-lowest report since January 2015. This really tells me that inflation isn’t a problem. The bond market continues to be quite happy with the current state of things. The 10-year Treasury is still below 3%. I don’t think a lot of bond watchers thought that would happen.

  All this leads us up to the next Fed meeting which is scheduled for September 25-26. The odds are roughly 99.9999999% that the Fed will raise rates at this meeting, though I could be low-balling it. Another rate increase would bring the target for Fed funds up to 2% – 2.5%. That would bring real rates (meaning, after inflation) all the way up to 0%. Real interest rates have been negative for 14 of the last 17 years.

  There’s also a chance another rate hike could finally invert the yield curve. The spread between the two- and ten-year Treasuries is currently just 21 basis points. That’s close to being the lowest point in 11 years. A rate hike in December is still an open question, though I seem to be in the minority. Wall Street is nearly convinced the Fed will move again. I’m not so sure. While the economy is definitely improving, there’s still not much in the way of pricing pressures. The futures market even thinks there will be a third hike coming in May.

  While I like all the stocks on our Buy List, I wanted to highlight a few that look especially good at the moment. Shares of Torchmark (TMK) dropped this week after they were downgraded by Goldman Sachs. I’m still a believer, and the lower share price helps. My Buy Below for TMK is $91, but if you can get it below $86, that’s a good deal.

  I also wanted to highlight Signature Bank (SBNY). I’ll warn you that SBNY is a frustrating stock. It can be very volatile. The good news is they’ve recently started paying a dividend. The current yield is just under 2%. Signature is also going for just 10 times next year’s earnings. Any buy order below $120 is a smart move.

  Chaos in Emerging Markets

  While the U.S. still looks mostly good, some economies overseas are crashing on the rocks. This happens every few years, and it looks to be happening again. So far, the main culprits are Argentina, Russia, South Africa and Turkey. With any crisis like this, there’s always the worry of contagion, which means watching the meltdown spread from country to country.

  All four countries have different reasons for the mess they’re in. Argentina borrowed too much. The peso got clobbered, and their Fed has had to jack up rates to 60%.

  In Turkey, President Erdogan has made just about every bad economic decision possible. He recently said, “If they have dollars, we have our people, our righteousness and our God.” Apparently, the bond market prefers the dollars. On top of that, President Trump has doubled tariffs on Turkish steel and aluminum. Erdogan has also named himself the head of Turkey’s sovereign wealth fund, which I’m guessing won’t reassure foreign investors. To give you an idea of the kind of building that’s been going on, when Erdogan became president 15 years ago, there were 50 shopping malls in Turkey. Now there are over 400. Check out the plunge in the Turkey ETF (TUR).

  

  Russia has been steadily isolated from the global economy. The ruble has been hammered against the dollar. Interestingly, Russia doesn’t have that much debt relative to GDP. Their problem is that they can’t turn to financing from foreign investors. That means much of their investment must come from inside, i.e. from spending targeted for something else.

  I want to be clear that these problems aren’t much of a threat to us and our Buy List. If anything, our conservatism is probably helping us when compared to the chaos of these economies. The major Emerging Markets ETF (EEM) is down about 20% from its January high.

  There tends to be a familiar script with financial crises. A country borrows too much. At some point, the bond market has had enough. Bond yields soar, and the currency tanks. That leads to political upheaval as inflation takes hold and the central bank raises rates to defend the currency. There are a zillion different permutations, but that’s the general idea. The only way to solve the mess is by making hard decisions. You can’t cheat debt investors forever.

  We should keep an eye on these issues. So far, I doubt they’ll continue to spread, but when markets turn manic, you never know where it will end. Now let’s look at some recent news impacting our stocks.

  Buy List Updates

  Checking the archives, I see that I haven’t written about Snap-on (SNA) recently. This is a terrible oversight on my part that shall be rectified immediately. The stock has been a workhorse lately. Since early May, shares of SNA are up over 30% for us.

  

  In July, SNA gapped up after an impressive earnings beat. For Q2, they raked in $3.11 per share. That was up 20% from last year, and it beat expectations by 16 cents per share. I was especially pleased to see a 0.3% increase in operating margins.

  I think the story with Snap-on is a pretty simple one: folks got way too pessimistic. The stock got beat down in the early part of this year. To be fair, I shared some of the pessimism, but not to enough to scare us out of the stock. I had been particularly concerned about some weakness in their tool division. However, the rising economy seems to be alleviating that issue. I didn’t think this would happen so soon, but SNA is now up 6.8% this year.

  Snap-on is due to report Q3 earnings in another month. Wall Street currently expects $2.85 per share. That’s an increase of 16% over last year. Even after Snap-on’s nice run, the stock is still going for less than 16 times this year’s earnings estimate. I also expect to see another dividend increase from Snap-on in early November. In the last five years, SNA’s dividend has more than doubled. This week, I’m raising my Buy Below price on Snap-on to $196 per share.

  Snap-on made a new 52-week high on Thursday, as did several other Buy List stocks; Danaher (DHR), Hormel Foods (HRL), Fiserv (FISV), Check Point Software (CHKP) and Sherwin-Williams (SHW). Also, RPM International (RPM) and Church & Dwight (CHD) came very close to new highs, but fell just short.

  I’ll quietly note that our problem-child stock, Ingredion (INGR), has been improving. I’m still disappointed with their performance this year, but we’ll learn a lot more soon when they report Q3 earnings. On a strict valuation basis, Ingredion looks tempting, but I want to make sure there are no more surprises.

  Another problem stock that’s improved lately is Alliance Data Systems (ADS). The stock started out terribly this year, but it turned a corner in May. The recovery had been going smoothly until mid-July when ADS got slammed for a 10% loss after a poor monthly business update. (For the record, I didn’t think it was that bad.) The Q2 earnings report was pretty good and ADS stood by its full-year forecast. ADS eventually rallied again, and on Thursday, the stock touched a seven-month high.

  I used to joke that there’s probably a great investing strategy to be gleaned by investing in our most beaten-down stocks. There may be some truth to that. The reason is that our stocks tend to be very high quality. Even when they fall from Wall Street’s favor, the fall often doesn’t last long.

  That’s all for now. Next week should be fairly quiet for economic news. However, I’ll be on the lookout for the housing-starts report which is due out Wednesday morning. Then on Thursday, we’ll get existing-home sales and the jobless-claims report. The following week should be more eventful as the Federal Reserve has a two-day meeting. Expect to see another rate increase from the central bank. 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. Dividend and income expert Tim Plaehn—whose articles and research I’ve been sharing with you over the past few months—is hosting a live interactive discussion on using his Disruptive Dividends strategy to boost your returns with little effort. He’s even going to show how to get dividend-like yield from stocks that don’t pay dividends. Toward the end of the discussion he’ll give us four actionable trades and then wrap up with a live Q&A. The event is on Wednesday, September 26th, and I’ve arranged for free registration for Crossing Wall Street readers. Click here for details.

• Morning News: September 14, 2018
  Eddy Elfenbein, September 14th, 2018 at 7:07 am

  Defying Erdogan, Turkey’s Central Bank Raises Interest Rates

  Talking Won’t End Trump’s Growing China Trade War Any Time Soon

  Shiller Says U.S. Stocks Could Go A Lot Higher Before They Fall

  Amazon’s Jeff Bezos: Big Businesses Should Be Scrutinized, Not Vilified

  So Long, Love Bug. Volkswagen Beetle Hits The End Of The Road.

  Sears Hints at Revival While Posting Yet Another Quarterly Loss

  Stealing From a Cashierless Store (Without You, or the Cameras, Knowing It)

  Kroger Sales Fall Short, Driving Shares Down

  The Tesla of China is Going Bananas As It Shakes Off Its First ‘Underperform’ Rating

  Elon Musk Doesn’t Need a COO. He Needs a New Board

  Goldman Sachs’ Next CEO Names New Finance Chief, President

  Days of Fear, Years of Obstruction

  Blue Harbinger: Hindenburg Omen Flashing Red, Is It Reliable?

  Ben Carlson: Is Software Eating Value Investing?

  Roger Nusbaum: Twitter War For The Ages

  Be sure to follow me on Twitter.

• Morning News: September 13, 2018
  Eddy Elfenbein, September 13th, 2018 at 7:16 am

  Turkey Raises Rates, Sending the Hard-Hit Lira Up Sharply

  Fed’s Brainard Says An Inverted Yield Curve Won’t Get in Way of Rate Hikes

  Bernanke Admits Fed Made Mistakes Combating Crisis 10 Years Ago

  Ten Years After Lehman Bankruptcy, New Books Point Finger at Two Men

  JPMorgan Predicts the Next Financial Crisis Will Strike in 2020

  Here’s What Wall Street Is Saying About Apple’s iPhone Revamp

  Facebook ‘Better Prepared’ to Fight Election Interference, Mark Zuckerberg Says

  Walmart’s Jet.com to Offer Nike Products in Bid for Urban Consumers

  The NFL’s Very Profitable Existential Crisis

  Champagne Makers Bubble Over A Bumper Crop Caused By European Drought

  Paying Is Voluntary at This Selfie-Friendly Store

  Joshua Brown: Ser Jamie

  Howard Lindzon: Do What You Can’t

  Barry Ritholtz: Crimes Were Committed

  Michael Batnick: How the Financial Crisis Affected Millenials

  Be sure to follow me on Twitter.

• From the NYT, September 14, 2008
  Eddy Elfenbein, September 12th, 2018 at 11:50 am

  Here’s a lede you don’t see often.

  In one of the most dramatic days in Wall Street’s history, Merrill Lynch agreed to sell itself on Sunday to Bank of America for roughly $50 billion to avert a deepening financial crisis, while another prominent securities firm, Lehman Brothers, filed for bankruptcy protection and hurtled toward liquidation after it failed to find a buyer.

  This was from the New York Times on September 14, 2008.

• Morning News: September 12, 2018
  Eddy Elfenbein, September 12th, 2018 at 7:07 am

  There’s Never Been a President This Unpopular With an Economy This Good

  Record U.S. Job Openings, Quits Rate Boost Wage Growth Outlook

  The Global Economy Is Still Feeling the Lehman Fallout 10 Years Later

  The Epicenter of the Housing Bust Is Booming Again. (That’s a Warning Sign.)

  The Recovery Threw the Middle-Class Under a Benz.

  Crypto’s 80% Plunge Is Now Worse Than the Dot-Com Crash

  The Wall Street Power Lunch is Back, With Martinis and Impunity

  Apple’s Newest iPhone Could Have Big Screen, Big Price

  In Tesla’s Shadow, China’s NIO Raises $1 billion From IPO

  FCC Pauses 180-Day Clock on T-Mobile and Sprint Merger for Additional Review

  Amazon Has Quietly Taken a Big and Fast-Growing Stake in a $7 Trillion Market

  Subway Kills The $5 Footlong — And Franchisees Stand To Gain

  Lawrence Hamtil: Valuable Lessons from Peter Lynch

  Ben Carlson: Wage Growth vs. The Stock Market

  Roger Nusbaum: The Two ETF Portfolio Gets More Diverse

  Be sure to follow me on Twitter.

• Stryker is Buying Invuity
  Eddy Elfenbein, September 11th, 2018 at 1:42 pm

  Stryker (SYK) is in a buying mood. This time, they’re buying Invuity (IVTY) for $7.40 per share. That’s about $190 million.

  Invuity is the leader in advanced photonics and single-use, lighted instruments that deliver enhanced visualization for a wide variety of clinical applications including orthopaedic and spine surgery, general surgery, and women’s health procedures, and is a recent entrant into the enhanced energy market. Founded in 2004, and headquartered in San Francisco, California, Invuity’s portfolio of innovative products is highly complementary to the Surgical portfolio of Stryker’s Instruments business.

  “Invuity’s innovative products in the single-use lighted instrumentation and enhanced energy markets provide best in class illumination and help make surgery safer,” stated Spencer S. Stiles, Group President, Neurotechnology, Instruments and Spine. “I look forward to the work we will do together to advance Stryker’s mission of making healthcare better.”

  Under the terms of the agreement, Stryker will commence a tender offer for all outstanding shares of common stock of Invuity for $7.40 per share, in cash. The boards of directors of both Stryker and Invuity have approved the transaction. The closing of this transaction is subject to the expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act and other customary closing conditions. The transaction is expected to close in the fourth quarter of this year and is expected to have an immaterial impact to net earnings in 2018.

• Crossing Wall Street 17 Years Ago
  Eddy Elfenbein, September 11th, 2018 at 9:32 am

  

• Morning News: September 11, 2018
  Eddy Elfenbein, September 11th, 2018 at 7:10 am

  From Trump to Trade, the Financial Crisis Still Resonates 10 Years Later

  Trump’s Sanctions on Iran Could Push Oil Prices Above $100 Per Barrel

  Renesas to Buy Chip Maker Integrated Device Technology for $6.7 Billion

  Tencent Folds’Em, Shutting Down Another Videogame as Beijing Tightens Grip

  Sonos Can’t Miss a Beat

  Ford Says Despite Trump’s Tweet, Focus Active Won’t Be Produced In U.S.

  Winklevoss Twins’ Gemini Trust Launches World’s First Regulated Stablecoin

  Salomon Ski Owner Gets $5.5 Billion Chinese Bid Ahead of Games

  American Eating Habits Are Changing Faster than Fast Food Can Keep Up

  The New American Dream Job Is Pretty Dull

  CBS Board Tries to Move Past Moonves Crisis With New Directors

  $10.4-Billion Lawsuit Over Diesel Emissions Scandal Opens Against Volkswagen

  Nick Maggiulli: Nothing Into Something

  Michael Batnick: Making Private Public

  Jeff Carter: Who’s The Biggest Anarchist of All-Time?

  Be sure to follow me on Twitter.