CWS Market Review – December 7, 2018

“If being the biggest company was a guarantee of success, we’d all be using IBM computers and driving GM cars.” – James Surowiecki

Apparently no one told Wall Street that it’s Christmastime. Of course, there certainly are a lot of grinches in well-tailored suits wandering the canyons of lower Manhattan, but this week, they were running the show and in charge. On Tuesday, the Dow shed 800 points. Then on Thursday, the Dow plunged another 785 points.

At 11:30, the market hit bottom and then commenced a furious rally. By the closing bell, the Dow had only lost 79 points, and the Nasdaq actually finished in the green. Get used to this kind of volatility. This is what happens when Wall Street is caught between two narratives and is trying to make up its mind.

In this issue of CWS Market Review, I’ll break it all down for you. The good news is that this latest hiccup paradoxically reflects some underlying strength in the economy. Also this week, we got a nice 11% dividend boost from Stryker. This is one of those tried-and-true stocks that has served us well. Before we get to that, let’s look at Wall Street’s latest temper tantrum.

The Bond Market Is Vetoing the Fed

All things considered, the investing climate still looks quite good right now. Inflation and interest rates are still low. Inflation isn’t much of a problem. The jobs market looks pretty good, and wages are finally improving. For next year, Wall Street expects earnings growth of 10%, give or take. That sounds about right.

What about the Fed? I think their rate-hike plays are too ambitious, and I strongly suspect that they’ll have to pare back their plans for three increases next year. In fact, I think it’s very likely that we’ll only get one rate hike in 2019 from the Fed. (Two, maybe.)

This comes after the rate hike I’m expecting when the Fed meets again on December 18-19. At that meeting, the FOMC members will update their economic forecasts for the coming few years. These forecasts are usually pretty bad, but at least it gives us a window into the Fed’s thinking.

On Monday, the stock market rallied on news that the Trade War appears to be headed towards some sort of détente. What that could be is still an open question, but all the good vibes melted away on Tuesday. The market started out in a bad mood, and things got worse from there.

The best way I can describe Tuesday is that it was almost like the month of October shoved into one day. If you recall, October was a tough month for the market, and it hit cyclical stocks particularly hard.

We saw investors rush towards safe assets like bonds. The yield on the 30-year Treasury has fallen for five straight days, and the yield is down to 3.14%. In early November, it was at 3.46%. The 10-year yield is now down to 2.87%. Bear in mind that yields in much of the developed world are microscopic, or even negative.

Check out this chart of the two-year (in blue) and ten-year yields (in red). Notice how much the red line has dropped recently. The gap is getting tight.

We even had a brief glimpse of the yield curve inverting this week. Specifically, the yield on the five-year Treasury actually dropped below that of the two- and three-year. In this case, it’s not that short rates are rising to the longer rates; it’s that the longer rates are falling. This usually reflects concerns about the economy as well as a desire to find a place to hide.

It’s interesting to note that riskier parts of the market are suffering the most. For example, the Russell 2000, a benchmark for small-cap stocks, is now down more than 15% from its high close. So is the S&P 500 High Beta Index. Both may soon hit 20% which is the traditional definition of a bear market.

As conservative investors, we don’t have much to fear from Wall Street taking a more skeptical view of the economy and the Fed. We just have to be aware that the shift will involve some volatility, and in the short-run, that may not be pleasant. What’s basically happening is that the bond market simply isn’t buying the Fed’s outlook. This skepticism seems to have grown slowly over the last few months and then surged in a wave over the last week.

I’m writing this to you ahead of the November jobs report. Wall Street expects that 190,000 net new jobs were created last month. There’s a chance that the unemployment rate could dip down to a 50-year low which would make it the lowest peacetime rate in 70 years.

Don’t be unnerved by this latest round of selling. In fact, there are some good bargains on our Buy List. Ross Stores (ROST), for example, looks quite good here. Later on, I’ll mention that we just saw new lows in two of our stocks. I think Torchmark (TMK) looks particularly good.

Buy List Updates

We got good news this week from Stryker (SYK). The orthopedic company just boosted its dividend by 11%. The quarterly payment will rise from 47 to 52 cents per share. The new dividend is payable on January 31 to shareholders of record on December 31. Based on Thursday’s close, the new dividend yields investors 1.18%.

The Wall Street Journal had some nice things to say about stock-exchange companies including our own International Exchange (ICE). These are wonderful businesses to run. Here’s a brief excerpt:

“Exchanges are sitting in a very pretty place in a lot of ways,” said Brad Bailey, research director for capital markets at Celent in New York.

Analysts and investors attribute this performance to large swings in stock, bond and currency markets. After historically calm trading conditions last year, a pickup in volumes on higher volatility in 2018 has been a boon to exchanges and market makers—intermediaries who stand ready to buy or sell shares at any time.

“When volatility hits, volumes will be there,” Scott Hill, chief financial officer at ICE, said on an earnings call in October.

On Thursday, two of our Buy List stocks, Alliance Data Systems (ADS) and Torchmark (TMK), both hit new 52-week lows. I know it’s not pleasant watching this happen, but these are two of the stocks I’m least concerned about. Last week, I mentioned that ADS is looking at selling off its Epsilon marketing business. That could fetch a nice payday. Torchmark is going for a little over 12 times next year’s earnings estimate.

Before I go, I wanted to mention some upcoming events. On Tuesday, December 11, I’ve been invited to address the Washington Association of Money Managers at the National Press Club. Drinks and hors d´oeuvres are at 6 p.m., and the talk starts at 6:30 p.m. The fee is $55. More details here.

Then on Wednesday, December 12, Michael Batnick of Ritholtz Wealth Management will be joining me for an Alpha Call at 4 p.m. ET. Michael is one of my favorite market mavens. You can register for the call here.

That’s all for now. Next week will be fairly quiet as far as economic reports go, although I’ll be curious to see what Wednesday’s CPI report has to say. So far, inflation has been cool. Let’s see if that continues. We’ll get another jobless-claims report on Thursday. Weekly jobless claims have been below 300,000 for 196 straight weeks. Then on Friday, we’ll get industrial production and retail sales. I’ll be curious to see how strong consumer spending was 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

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Buy These 3 Growth Stocks and Pay NO Commission

Robinhood is still growing rapidly. It added about 3 million accounts over the past year, bringing its total number of customers to 5 million, which is more than twice the big three incumbent discount brokerage firms combined. And it remains the only venue that offers trading on stocks, options and cryptocurrencies all in one place.

I first told you about it adding ADRs back in September. At that time, Robinhood announced it was adding about 250 ADRs from Japan, China, Germany, the U.K. and elsewhere. ADRs of companies from France will be added in the coming months. A quick definition of ADRs is that they are stocks of foreign companies that trade and settle in the U.S. market in dollars, allowing investors to avoid having to transact in a foreign currency.

Robinhood co-founder and CEO Vlad Teney told CNBC at the time, “We looked at what customers were searching for and not getting. It [adding ADRs] allows customers to get some exposure outside of the U.S.”

The company found its users wanted access to global stocks by looking at its own search data. Robinhood’s staff has access to what people are typing into the app’s search and looking to trade. Names such as Nintendo, Adidas, BMW and Heineken continued to pop up. The company used similar reasoning in February when it decided to add cryptocurrency trading after users repeatedly searched for bitcoin.

As someone that owns a good number of foreign stocks personally, this was fantastic news. This move made investing in overseas blue chip stocks easy, safe, and cost-efficient. While there are hundreds of quality foreign companies to choose from on Robinhood’s platform, let me briefly highlight for you three of them.

Make This Trade For a 20% Drop in General Electric

Several monumentally bearish trades hit the wire last week that suggest GE could be in for even more punishment. The headliner of these trades came in the form of a put purchase… not just any put purchase though. A strategist purchased 300,000(!!) January 18th puts at the 6 strike – this with the stock at $7.50.

The trader paid $0.19 for each put, but that amounts to $5.7 million in premium when executed 300,000 times. Breakeven is all the way down at $5.81, with max loss occurring anywhere above $6 at expiration (with the full premium at risk). On the other hand, every dollar below the breakeven point can generate $30 million in profits.

It’s possible this trade is a hedge. However, given the execution of several other very large bearish trades in GE around the same time, this could very well be speculation on another plunge in the share price.

Let’s put it this way – not only is the trader betting on another 20%+ drop in the share price, but it could happen by January expiration. That’s less than two months away! By the way, even if this is a hedge, it’s a lot of money to spend with the stock at such a low price – which means someone is really worried about downside.

The bottom line is if you own GE shares and want to hold on to them, I highly recommending hedging.

Posted by on December 7th, 2018 at 7:08 am


The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.