Archive for November, 2018

  • CWS Market Review – November 30, 2018
    , November 30th, 2018 at 7:08 am

    “Interest rates are still low by historical standards, and they remain just below the broad range of estimates of the level that would be neutral for the economy.” – Federal Reserve Top Banana Jerome Powell

    See those two words “just below” in bold in the quote above? Those two little words rocked the entire market this week. Thanks to “The Two Little Words” (T2LW) on Wednesday, the S&P 500 had its best day in eight months.

    How could that be? In this week’s issue, I’ll explain what it all means. I’ll also take a look at three of our recent Buy List earnings reports. Wall Street was less than pleased, but I’ll break it down for you. We also got a nice dividend hike from Hormel. The Spam people have now raised their dividend for 53 years in a row. Also, ADS is planning to sell off its marketing business.

    But first, let’s look at what Jay Powell had to say and why it sparked a big rally on Wall Street.

    What ”Just Below” Means

    Let’s turn back the clock to October 3. That’s when Mr. Powell said in an interview, “We may go past neutral, but we’re a long way from neutral at this point, probably.” That’s Fedspeak for “I will absolutely wreck this economy if I have to in order to kill inflation.” Not surprisingly, that comment really spooked Wall Street. Traders took it to mean that the Fed was going to continue raising interest rates even though the yield curve was getting close to flat. The Fed might even raise rates a lot.

    By neutral rate, they mean there’s some magic interest rate out there, and if we’re below it, the economy is being helped, but if we’re above it, the economy is being constrained. The problem is, no one knows where the neutral rate is, so we have to guess. Even though we don’t know where the neutral is, we can occasionally get a faint hint as to its whereabouts. (If you want to be among the cool kids, the neutral rate is called “R-Star”.)

    People were unnerved by Powell’s remark and by October 10, the market finally cracked. The S&P 500 lost 5.3% in two days, and the pain lasted during much of the month of October. Looking inside the market, we can see that much of the damage from Red October was focused on housing stocks and construction in general. This makes sense because higher rates from the Fed means higher mortgage costs, and that means few home sales. We also saw some soggy housing reports recently. In other words, footprints of R-Star.

    On our Buy List, stocks like Sherwin-Williams (SHW) got absolutely clobbered in October even though there was little stock-specific news. When the earnings report finally came, it was a bit below expectations, but nothing terrible. Interestingly, the shares have been recovering quite nicely since the earnings report. I suppose true expectations were for disaster, and that didn’t come.

    What was Powell thinking in being so aggressive? Sure, the jobs market was looking better, but there haven’t been signs of inflation. In fact, commodity prices have been dropping. Oil is down, and the dollar has been strong.

    In September, the Fed’s “dot plot” was forecasting three more rate hikes for next year on top of one more increase next month. As recently as three weeks ago, the futures market pegged a 23% chance of three more rate increases next year.

    But the stock slide has changed perceptions. President Trump has also criticized the Fed. The president told the Washington Post, “So far, I’m not even a little bit happy with my selection of Jay. Not even a little bit. And I’m not blaming anybody, but I’m just telling you I think that the Fed is way off-base with what they’re doing.”

    The president isn’t alone in his thinking, and that brings us to Powell’s comments from Wednesday. The Fed Chairman seems to have changed his tune by saying that we’re “just below” neutral. In other words, many more rate hikes are not coming. In fact, by looking at the stock chart, you can tell the exact moment at which Powell started speaking.

    Let’s look at a possible game plan for the Fed. I think it’s very likely that they’ll hike next month, but after that, they may take a pause. In fact, I think it’s very reasonable that the Fed will hike rates just once in 2019.

    A pause from the Fed is very good for stocks, and that’s what we saw. Let’s also remember that stocks had not been doing well. The S&P 500 “tested” its closing low from late October. In fact, last Friday, the index closed at 2,632.56, which is the lowest close since early May. On top of that, the stock market’s P/E Ratio has been falling for much of this year.

    There’s one more hurdle left, and that’s the 200-day moving average. The S&P 500 is now less than 1% from its 200-DMA. If we can convincingly break above that, then I think we’ll see many more months of gains. Now let’s look at some of our recent Buy List earnings reports.

    Earnings from Ross Stores, Hormel Foods and Smucker

    Over the Thanksgiving break, we had three Buy List earnings reports. These are our three Buy List stocks that have quarters ending in October.

    Ross Stores (ROST) has been in a major funk lately, which is odd because I still like the deep-discounter a lot. The stock recently fell for ten days in a row for a total loss of 22%. That’s basically the same as the entire stock market’s one-day crash in 1987.

    Despite that, on Tuesday, November 20, Ross Stores reported fiscal Q3 earnings of 91 cents per share. Sales rose 7% to $3.5 billion. The important metric for us, same-store sales, rose by 3%. Going into this quarter, Ross told us to expect earnings between 84 and 88 cents per share and same-store sales growth of 1% to 2%. Wall Street had been expecting 90 cents per share.

    Barbara Rentler, Chief Executive Officer, commented, “Both sales and earnings for the quarter were ahead of our forecast, despite being up against very strong multi-year comparisons. Though above plan, operating margin of 12.4% was down from last year as higher merchandise margin was more than offset by increases in freight costs and this year’s wage investments.”

    Ms. Rentler continued, “During the third quarter and first nine months of fiscal 2018, we repurchased 2.9 million and 9.4 million shares of common stock, respectively, for an aggregate price of $278 million in the quarter and $807 million year-to-date. We remain on track to buy back a total of $1.075 billion in common stock during fiscal 2018.”

    For Q4, which is the all-important holiday quarter, Ross projects same-store sales growth of 1% to 2%. For EPS, they see that ranging between $1.09 and $1.14 per share. That’s the same as the previous guidance, but it now includes a gain of seven cents per share due to the resolution of a tax matter.

    For the entire year, Ross sees earnings of $4.15 to $4.20 per share. In the earnings report, Ms. Rentler sounded cautious: “As we enter this year’s holiday season, not only are we up against our toughest sales comparisons from 2017, but we are also expecting another fiercely competitive retail environment.”

    This is basically what I expected. Their Q3 guidance was low, but that’s what they often do. The outlook for Q4 is the same as before. That didn’t stop the stock from getting hammered. ROST rebounded a little this week. I’m still a Ross fan, but I’m lowering our Buy Below to $92 per share.

    Also on November 20, Hormel Foods (HRL) reported fiscal Q4 earnings of 51 cents per share. That was two cents above estimates. Unfortunately, their revenues were pretty weak. Organic sales fell 1%, and operating margin slipped to 12.6%. For the year, the Spam folks made $1.57 per share.

    For 2019, Hormel sees revenue ranging between $9.7 and $10.2 billion and EPS between $1.77 and $1.91. That’s not bad. The shares initially got dinged after the report but have since recovered. The stock is now about where it was prior to the earnings report.

    Hormel also raised its dividend from 18.75 cents to 21 cents per share. (I had predicted 20 cents per share.) That’s their 53rd consecutive dividend increase. It’s also their tenth-straight year of double-digit increases. Not bad. I’m raising my Buy Below on Hormel Foods to $49 per share.

    On Wednesday, JM Smucker (SJM) reported fiscal Q2 earnings of $2.17 per share. That missed Wall Street’s consensus by 17 cents per share. Net sales rose 5% to $2 billion which was $100 million below consensus. Traders were not pleased. The stock got slammed for a 7% loss on Wednesday.

    Smucker is in a bit of a jam. One problem is the pet-foods business. Overall, growth has been good for pet foods, but it still hasn’t matched expectations. The business has also been hurt by higher transportation costs. Also, Smucker’s overall business has been plagued by a weak pricing environment. The company said it expects better performance next year.

    Smucker also lowered its full-year guidance. The company now expects net sales of $7.9 billion and earnings between $8.00 and $8.20 per share. The previous forecast was for $8.0 billion and earnings between $8.40 and $8.65 per share. I’m keeping our Buy Below at $114 per share.

    Buy List Updates

    There are two Buy List stocks with quarters ending in November, RPM International (RPM) and FactSet (FDS). RPM probably won’t report until the first week of 2019. FDS said they’ll report their fiscal Q1 results on Tuesday, December 18. That will be our final Buy List earnings report for the calendar year.

    On Tuesday, Alliance Data Systems (ADS) said it’s looking at selling its Epsilon marketing business. There’s no guarantee that ADS will sell, but the company is seriously exploring that option.

    Last month, Acxiom sold its marketing business for $2.3 billion, which probably planted the idea in Alliance’s mind. Last year, Epsilon made up about 30% of Alliance’s total revenue. The company said it would use the proceeds to pay down debt, buy back shares and pay out dividends.

    That’s all for now. Next week is December, and we’ll get some of the key monthly economic reports. On Monday, the ISM Manufacturing Index comes out. The last one was 57.7 which is little weaker than I had expected. On Wednesday is the ISM Non-Manufacturing Index. We’ll also get the ADP payrolls report, plus Fed Chairman Powell will be speaking. Thursday is jobless claims. Then Friday is the big November jobs report. Last month, the economy created 250,000 new jobs, and the unemployment rate stayed at 3.7%. 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. On Monday, I’ll be on Bloomberg TV’s “The Close” between 3:50 pm and 4:10 pm.

  • Morning News: November 30, 2018
    , November 30th, 2018 at 7:06 am

    The Stock Market’s Dangers Are Easier To See Now

    Saudi Arabia Faces a Dramatic Choice at OPEC

    Chinese Sneeze Could Give Europe Inc. a Nasty Flu

    How Tariffs Work, and Why China Won’t See a Bill

    Trump Goes Into Trade Talks With Xi Holding One Big Advantage

    Fed Jumps Off Predictable Path and Into a Policy Wilderness

    SoftBank Becomes First Japan Firm to Forgo IPO Price Range, Keeps View at 1,500 Yen

    This Store Lets Holiday Shoppers Buy Gifts For Refugees

    Eddie Lampert’s Next Play: Inside the Hedge Fund War at Sears

    Fed Ramps Up Goldman Probe Over 1MDB Compliance Failures

    Macron, Abe to Discuss Renault-Nissan at G20 as Feud Brews

    Former Autonomy Boss Lynch to Fight U.S. Fraud Charges

    Cullen Roche: John Bogle is Wrong About Index Funds

    Roger Nusbaum: Dousing the FIRE?

    Jeff Miller: Boost Your Royal Dutch Shell Dividend Yield

    Be sure to follow me on Twitter.

  • Personal Income and Jobless Claims
    , November 29th, 2018 at 12:56 pm

    The day after the GDP report comes out, the government releases the income and spending data for the prior month. This morning, the report said that personal income rose 0.5% in October while personal spending rose by 0.6%. Those are both very good numbers.

    Here’s the long-term trend:

    One point of concern is that this morning’s jobless claims report rose to 234,000. That’s the highest since March 31, although it ties a report from May 19. Is the labor market in trouble?

    A few points to note. One is that this report is coming off very low readings for jobless claims, literally 50-year lows. Secondly, this data series tends to bounce around a lot. That’s why most economists use the four-week moving average. I’d want to see more evidence from the official jobs report before I’d say that the jobs market is cracking.

  • Morning News: November 29, 2018
    , November 29th, 2018 at 7:09 am

    Oil Drops Below $50 on Concern OPEC+ Won’t Cut Output Decisively

    Deutsche Bank Raided by Police in Money-Laundering Probe

    South Korean Court Orders Mitsubishi of Japan to Pay For Forced Wartime Labor

    Fed’s Powell, in Apparent Dovish Shift, Says Rates Near Neutral

    Don’t Count on the Fed Saving Stocks Again

    Trump Administration to Study Tools to Raise U.S. Tariffs on Chinese Autos

    Why Ford Will Keep Plants Humming and Trump Happy

    A Farmer’s Tough Choices in Coping With the Trade War

    More Small Companies Avoid IPOs, Sapping U.S. Economy’s Vitality

    Ad Buyers Skeptical as Snap Looks Beyond Teens for Growth

    Amazon Web Services Could Soon Be Worth a Massive $350 Billion

    Cash-Strapped Millennials Are Turning to Installment Plans to Pay for T-Shirts and Jeans

    Jeff Miller: Stock Exchange: Did The Market Just Bottom?

    Ben Carlson: Animal Spirits: Passive Income

    Jeff Carter: Innovation Happens With Less Weight

    Be sure to follow me on Twitter.

  • Guess What Time Powell Started Speaking
    , November 28th, 2018 at 2:14 pm

    If you look really hard, you can almost make it out.

  • GDP and New Homes Sales
    , November 28th, 2018 at 12:23 pm

    Two quick economic reports to mention this morning. Q3 GDP was revised to unchanged. The government says the economy grew by 3.5% during the third quarter of this year. Even down to the decimal, this report was barely changed. This report will be revised again in late December.

    Now economists are looking at growth for Q4. My guess is something around 2.5%.

    The new-homes sales report showed that there were 544,000 new homes sales last month (that’s an annualized number). This is down 12% from a year ago. The previous months were revised higher. There’s a good chance that new-home sales will be down for 2018.

    Here’s a link to Jay Powell’s address at the Economic Club of New York. It’s long but covers the Fed’s thinking.

  • Smuckers Earns $2.17 per Share
    , November 28th, 2018 at 9:41 am

    Here’s the executive summary from today’s earnings report from JM Smucker (SJM):

    Net sales increased $97.9 million, or 5 percent, led by the addition of Ainsworth and the Company’s growth brands.

    Net income per diluted share was $1.66. Adjusted earnings per share was $2.17, an increase of 7 percent.

    Fiscal 2019 second quarter results include a $26.6 million pre-tax gain related to the divestiture of the U.S. baking business. The effective tax rate of 30.0 percent reflects the tax impact associated with the sale of the baking business.

    Free cash flow was $125.1 million in the second quarter and $266.8 million through the first half of the fiscal year.

    The Company updated its full-year fiscal 2019 net sales, adjusted earnings per share, and free cash flow outlook.

    CEO Remarks

    “Our net sales increase was supported by the positive contribution from the acquired Rachael Ray® Nutrish® brand,” noted Mark Smucker, Chief Executive Officer. “We also realized strong sales gains across many of our growth brands, including Smucker’s® Uncrustables®, Nature’s Recipe®, and Café Bustelo®. We are focused on growing brands consumers love in the pet food, coffee, and snacking categories, as highlighted by the completion of the U.S. baking business divestiture during the quarter. While the income taxes related to the sale of the baking business impacted our earnings per share, we were pleased with the business results for the quarter. Ongoing execution of our strategy for both growth and core brands is essential to delivering long-term shareholder value.”

    Smucker also lowered its full-year guidance. The company now expects net sales of $7.9 billion and earnings between $8.00 and $8.20 per share. The previous forecast was $8.0 billion and earnings between $8.40 and $8.65 per share.

    The stock is down about 6% in today’s trading.

  • Morning News: November 28, 2018
    , November 28th, 2018 at 7:18 am

    Brazil Oil Tanker Collision Reveals Offshore Regulatory Gaps

    New Zealand Blocks Huawei, in Blow to Chinese Telecom Giant

    Trump Open to Deal with Xi at Dinner but with Conditions

    Mnuchin Asked About Fed Option That Could Avoid Rate Hikes

    U.S. Housing Market Seen as ‘Tough’ for Both Buyers and Sellers

    What’s Behind the G.M. Cutbacks, and Why Trump Is Angry

    GM Needs China More Than It Fears Trump

    The $15 Billion Money Pit Dragging GE Down

    United Technologies’ Split Will Create A Giant Of A Different Kind

    Spotify Secures Rights to Booming Indian Music Market

    “I Hereby Confess Judgment”

    Energy Speculators Jump on Chance to Lease Public Land at Bargain Rates

    Nick Maggiulli: What You Can’t Buy

    Roger Nusbaum: A Little More Defense

    Howard Lindzon: I Like Charts!

    Be sure to follow me on Twitter.

  • Elfenbein Correct, Internet Wrong
    , November 27th, 2018 at 1:55 pm

    Yesterday, I posted this on Twitter:

    My point is that even with a revolutionary business like Apple, its stock may not be a winner in the very long term. Markets are inherently dynamic and as such, they can be very frustrating.

    The tweet got a lot of attention, and I think my point was clear. Being the internet, however, I got a few unusual responses.

    For example:

    Oh boy.

    1. No, it’s not wrong. It’s accurate.
    2. Of course I picked the exact high and low. That’s my point.
    3. Of course I’d be wealthier. Again, that’s the point. Even an amazing company like Apple can be dead money for a long time. Plus, I’m an odd person to lecture on the merits of buy-and-hold.

    Some people pointed out that I didn’t include dividends.

    In my defense, I never claimed they were dividend-adjusted returns. Apple did pay a modest dividend from 1987 to 1995. That dividend wasn’t raised after 1990. It was discontinued and eventually brought back in 2012.

    The dividend would have helped returns, but not by much, and certainly not “much bigger.” Unfortunately, the numbers at Yahoo Finance don’t adjust the dividends for splits. As a result, the adjusted returns look much larger than they really are.

    Here’s an example:

    No, no, no. You can tell Yahoo Finance’s numbers are wrong because it means Apple would have had a double-digit dividend yield over 20 years even though it only paid a dividend for eight years. That, or Yahoo Finance’s numbers are wrong. They have the dividend right, they just didn’t split it.

    According to this website, with dividends, the $10,000 would have become $9,137.76, which sounds about right. The dividends would have added about 9% to the total haul.

    Many more responses, including the uninformed:

    Nope, not on drugs and they only did two splits in those 20 years.

  • ADS Weighs Sale of Epsilon Marketing Business
    , November 27th, 2018 at 9:41 am

    From the Wall Street Journal:

    Alliance Data Systems (ADS) is exploring a potential sale of its Epsilon marketing-services business, the company said Tuesday.

    The company said it will review strategic alternatives for the business, which generated revenue of $2.2 billion in the year ended Sept. 30, though there is no guarantee a transaction will occur. Alliance Data said that it will make disclosures as appropriate and that its board will make a final decision on any specific action.

    The move was the result of an internal review of operations, Alliance Data said. The company said that if it divested the business it would use proceeds to reduce debt and return capital to shareholders through stock buybacks or dividends.

    Analysts had viewed a sale of the Epsilon business as a possible result of the review. Susquehanna Financial Group analysts said in a note last month that Acxiom Corp.’s ]deal in July to sell its marketing-solutions business to Interpublic Group of Cos. for $2.3 billion likely “opened the eyes” of Alliance Data management to prospects for Epsilon.

    The Epsilon business this year has been hurt by weaker-than-expected revenue from its agency services and site-based displays in addition to client bankruptcies, Alliance Data executives told analysts on an earnings conference call in October. Last year Epsilon accounted for roughly 30% of Alliance Data’s total revenue.

    Alliance Data bought Epsilon in 2004 to help it expand into different industry sectors in providing loyalty-marketing services and bolster its private-label credit-card business. Epsilon in 2014 bought Conversant for $2.3 billion in cash and stock in a bid to bolster its digital-marketing capabilities.

    Epsilon employs over 8,000 people in 70 offices world-wide, according to Alliance Data. Plano, Texas-based Alliance Data has about 20,000 employees across its businesses.

    Shares in Alliance Data, which have fallen 9.3% over the past 12 months, rose 0.5% to $202 in low-volume premarket trading.