Archive for February, 2019

• Q4 GDP Growth = 2.6%
  Eddy Elfenbein, February 28th, 2019 at 9:20 am

  From CNBC:

  U.S. economic growth was better than expected as 2018 came to a close, with GDP rising 2.6 percent, according to a first estimate the Commerce Department released Thursday.

  Economists surveyed by Dow Jones expected a gain of 2.2 percent after a 3.4 percent rise in the third quarter. The growth came amid a bevy of uncertainty and a time when the stock market briefly slid into bear market territory.

  While the GDP report was only preliminary, it would mean average growth for the year was 3.1 percent.

  Growth was helped by a 2.8 percent rise in consumer spending along with increased nonresidential fixed investment, exports, private inventory investment, and federal government spending. Weakness in residential fixed investment, which fell 3.5 percent, and state and local government spending served as a drag. The gross private domestic investment gain slowed to 4.6 percent in the quarter after a robust 15.2 percent rise in the previous period.

  Exports rose 1.6 percent in the quarter, reversing a 4.9 percent decline in the previous quarter, while imports increased by 2.7 percent, making trade a slight net negative.

  Last year was the best year for economic growth since 2005, narrowly beating out 2006 and 2015.

  Here’s a look at annualized real GDP growth per capita:
  50s: 2.53%
  60s: 3.06%
  70s: 2.19%
  80s: 2.14%
  90s: 2.10%
  00s: 0.82%
  10s: 1.48% (so far)

  The big surge in the early 60s is an outlier. Long-term growth was remarkably stable from the mid-1960s until the last recession.

  It’s interesting how this data undercuts so much cultural history (70s = bad economy; 80s = good economy). For example, 1978 was the second-best year for growth in the last 45 years, and it was mid-cycle, too, not rebounding off the bottom. I would not have guessed that. Or, after the surge from the Korea War, growth in the 1950s wasn’t that great.

• How the Market Performs Around Big Days
  Eddy Elfenbein, February 28th, 2019 at 8:37 am

  Here’s a research project I’ve been working on. I was curious to see if the market has historically evinced any sort of pattern before and after 2% down days.

  I took all the S&P 500 daily closings since 1960. I realized I needed to use some kind of band so I sorted of all the daily moves between -1.9% and -2.1%. There were 91 such days which is about 0.6% of the time. I then pulled out 41 days: the 20 days before the big drop, the big drop and the 20 days following the drop.

  I found that yes, there is a pattern. The market rallies before the big drop, about 1.5% in 10 days, which shouldn’t be too unexpected. However, the market tops out five days before the drop. The market then slowly slides before – wham! Down 2%.

  Here’s what I found surprising. After the 2% drop, the market has continued to sink. It’s a momentum trade, and after about 10 days, the market has really started to fall. In the 20 days following a 2% drop, the market has historically lost another 1.73%, and that’s on top of the 2% loss.

  Now I was curious to know what happens after a +2% daily jump. I assumed it would be the mirror image of the 2% fall. It’s not. I found 93 such days. In the 20 days before the big jump, the market hasn’t done much of anything. It has flatlined, but after the 2% jump, the market has lost ground, but not by much; -0.67% in 20 days.

  Lots of questions. Is the market reverting? How come a 2% move prompts a countertrend while a 2% drop continues one? I don’t know. Perhaps down moves are more trend-sensitive.

  I then tried the same experiment but with 1% up days and 1% down days. Again, I used a band of 0.9% to 1.1%. Now we’re dealing a lot more data, around 500 days for each.

  Like the -2% day, the market has rallied into a 1% drop but not as much. Unlike the -2% day, the market has rallied a little bit (a very little bit) after a 1% drop. The move works out to less than 3% annualized. The 1% drop basically has canceled out the moves before and after the drop.

  The time around a 1% up day is good for the bulls. The market has rallied 0.60% ahead of the bump and another 0.55% afterwards. That’s about the long-term average, but combined with the 1% jump it makes it good for investors.

  The emerging picture seems to be that high volatility is simply bad news for stocks. Market students know that the market’s best days usually happen in the middle of lousy markets, but even modestly strong days aren’t that great for stocks.

  One final test. What about flat days? I found more than 1,900 days between -0.1% and +0.1%. Flat days come amid good times. Twenty days prior to flatness, the market has gained 0.40%. Annualized that’s 5.2%. But here’s the surprise, the market has gained 1.07% in the 20 days following a flat day. That’s more than 14% annualized. I didn’t see that coming.

  I also looked at 3% up and down days (2.9% to 3.1%), but there isn’t a lot of data so I’d want to be humble about any conclusions. However, the market has done horribly after 3% days of any direction. Down 3.25% after 3% losses, and down 5% after 3% gains. Yikes.

  Conclusion: There seems to be a horseshoe effect. Big up and big down days are bad. I would guess there’s a sweet spot, probably a mildly positive day of 0.2% or so – that’s the ideal environment.

  For any future research, I would recommend looking at more days. Maybe 100 before and 100 after. I’d also look to see if there’s a discernible trend towards an ideal spot.

  Here’s a chart of the data which I hope is self-explanatory.

  

• Morning News: February 28, 2019
  Eddy Elfenbein, February 28th, 2019 at 7:09 am

  U.S.-China Negotiations Risk Shutting Out the Rest of the World

  U.S. Drops Threat of 25% Tariffs on Chinese Goods in Sign That Accord Is Near

  How Debt Makes the Market Volatile

  Consumers, Weak Exports Seen Curbing U.S. Fourth-Quarter Growth

  The Perils Of Investing Idol Worship: The Kraft Heinz Lessons!

  America’s Cities Are Running on Software From the ’80s

  Let’s Tackle Real Antitrust Problems. AT&T Isn’t One.

  Tesla: The Setup

  Tesla’s Musk Calls SEC ‘Broken’ in New Twitter Spat

  G.M. Backs Rule to Curb Carbon-Monoxide Risk in Keyless Cars

  This Is What Peak Car Looks Like

  Starbucks’ China Rival Luckin Coffee Taps Three Banks for U.S. IPO

  Jeff Carter: Dynamic Pricing in The Future

  Jeff Miller: Realty Income’s Near-Term Momentum, Long-Term Risks

  Joshua Brown: How to Follow the Economy

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• Quick Update
  Eddy Elfenbein, February 27th, 2019 at 6:59 pm

  I was on Bloomberg this afternoon. If I can find a video link, I’ll post it.

  Not much news today but it was a good day for our Buy List. We outperformed the market by 61 basis points. Danaher is still climbing. It was up another 2.6% today. In the last week, DHR is up almost 13%.

• Morning News: February 27, 2019
  Eddy Elfenbein, February 27th, 2019 at 7:17 am

  You Don’t Need a PhD Anymore to Read Fed’s Statements

  Powell Delivers a Subtle Message to Markets

  FTC Aims New Task Force at Big Tech

  Buffett Criticizes Others For Using Non-Standard Accounting — But He Does Too

  U.S. Justice Department Will Not Appeal AT&T, Time Warner Merger After Court Loss

  Boeing Signs $15.7 Billion Vietnam Orders on Trump’s Visit

  Musk Lays Into SEC With More Tweets After U.S. Contempt Claim

  General Electric’s Power Guidance Won’t Be Pretty

  General Electric Stock Is Soaring and Analysts Are Backing It Up

  Warren Buffett Joins the Crowd Struggling to Understand Oracle

  A Record 430 Billionaires Drop Off Hurun’s Global Rich List

  There’s A Beer That Tastes Just Like Lucky Charms

  Nick Maggiuli: The Easiest Retirement Choice

  Ben Carlson: What’s the Return on Mortgage Prepayments?

  Michael Batnick: Regret-Adjusted Returns

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• Smucker Earned $2.26 per Share
  Eddy Elfenbein, February 26th, 2019 at 11:39 am

  On Friday, JM Smucker (SJM) dropped sharply after the terrible earnings report from Kraft Heinz. This morning we learned that despite the problems at KHC, Smucker is doing just fine.

  For their fiscal Q3, the jelly people earned $2.26 per share, which beat Wall Street’s estimate of $2.02 per share. Sales rose 6% to just over $2 billion. The company also stood by its full-year forecast.

  “We are pleased with the progress that we made in the third quarter to advance our consumer centric strategy for growth, including increasing contributions from new platforms such as 1850™ coffee and Jif® Power-Ups™ snacks,” said Mark Smucker, Chief Executive Officer. “Our results reflect strong sales across all of our key growth brands, including double-digit increases for Rachael Ray® Nutrish®, Smucker’s® Uncrustables®, Nature’s Recipe®, and Sahale Snacks®. We are also pleased with our cost management efforts, as we continue to deliver on our synergy and cost savings targets. Across all our businesses, we are executing on our strategic plan focused on meeting consumer and retail trends and delivering sustainable long-term growth.”

  For the full year, which is just one more quarter, Smucker expects sales of $7.9 billion and earnings of $8.00 to $8.20 per share. They’ve already made $6.20 per share for the first three quarters, so that translates to a Q4 range of $1.80 to $2.00 per share.

  Let’s look at SJM’s different divisions. Coffee sales were $561 million. That’s the most profitable division. Retail consumer foods had sales of $422 million. Retail pet food was $759 million. The international division had sales of $228 million.

  The stock has been up as much as 8% this morning.

  Update: Smucker closed up 5% today.

• Morning News: February 26, 2019
  Eddy Elfenbein, February 26th, 2019 at 7:21 am

  Burned by Russia, Poland Turns to U.S. for Natural Gas and Energy Security

  Do Two Troubled Banks Make One Good One? Germany May Find Out

  Too Much Cash, Too Little Time: The Latest U.S. Debt Cap Dilemma

  This Stock Market Rally Has Everything, Except Investors

  How to Really Tax the Rich

  Yellen Rips Trump’s Grasp of the Federal Reserve and What It Does

  U.S. Business Lobby Says Most Firms Favor Tariffs While China Trade Talks Underway

  General Electric’s Monumental Move

  Tesla Shares Fall After SEC Asks Judge to Hold Elon Musk in Contempt for Violating Deal

  Home Depot Plans $15 Billion Buyback as Profit Falls Short

  Newmont Mining Stock Slips on Barrick Gold’s Below-Market Buyout Offer

  BofA Drops Merrill Lynch Name From Investment Bank Brand

  Joshua Brown: All The Warren Buffett CNBC Clips From Today

  Roger Nusbaum: Is Buying A Home A Sucker’s Bet?

  Howard Lindzon: Momentum Monday – March Madness in February?

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• The Continental Building Rally Continues
  Eddy Elfenbein, February 25th, 2019 at 10:55 am

  I have to admit that the big surge from Continental Building Supplies (CBPX) on Friday caught me off guard.

  I thought the earnings report was just fine but I probably underestimated how pessimistic the market was. Anything fine looked great. The stock jumped significantly, and the rally has continued into this morning.

  

• Danaher Buys GE’s BioPharma Unit
  Eddy Elfenbein, February 25th, 2019 at 10:30 am

  This morning, Danaher (DHR) announced that it’s buying General Electric’s biopharmaceutical business for $21.4 billion. The deal is all cash. If you recall, GE’s new CEO is Larry Culp who used to be CEO of Danaher (and a person who helped make a lot of money for us.)

  Nor is this the first GE garage sale that we’ve been a part of. GE sold its transportation unit to Wabtec, a former Buy List stock. That deal completed today. In April, Danaher approached GE for a deal, but GE wasn’t interested. This time, they were. Initially, GE had wanted to sell off their entire healthcare business of which the biopharma business is just a part.

  Danaher’s President and CEO, Thomas P. Joyce, Jr., said, “GE Biopharma is renowned for providing best-in-class bioprocessing technologies and solutions. This acquisition will bring a talented and passionate team as well as a highly innovative, industry-leading product suite to our Life Sciences portfolio, providing an excellent complement to our current biologics workflow solutions.”

  Joyce continued, “We expect GE Biopharma to advance our growth and innovation strategy in an important and highly attractive life science market. We see meaningful opportunities to harness the power of the Danaher Business System to further provide GE Biopharma’s customers with end-to-end bioprocessing solutions that help enable breakthrough development and production capabilities. We look forward to welcoming this talented team to Danaher.”

  Danaher said the deal should be completed by the fourth quarter. Breaking down the numbers, Danaher said they’re paying 17 times expected earnings. To fund the deal, Danaher will issue a mix of debt and equity. Danaher still has plans to spinoff its dental business later this year. The proceeds from that will help fund the GE deal. Danaher also spunoff Fortive a few years ago.

  GE has been in a great deal of trouble and the company needs to raise cash. As a result, it has sold off assets in an attempt to save the business.

  Update: Danaher rose 8.5% today.

• Morning News: February 25, 2019
  Eddy Elfenbein, February 25th, 2019 at 7:07 am

  Trump Extends China Tariff Deadline After ‘Substantial’ Progress

  This Is What a Bull Run Looks Like in China’s Stock Market

  Get Used to Oil Tankers Hauling Seawater to America

  Fed Embarks on a Rethink of Its Inflation Target

  Roche to Buy US Biotech Spark Therapeutics in $4.8 Billion Deal

  Newmont Says Rival Miner Barrick Gold Has Bought a Small Stake

  Huawei’s Plight Hangs Over Wireless Industry Showcase

  Peloton Picks Goldman Sachs, JPMorgan to Lead IPO

  Qualcomm Rolls Out 5G Chips for Cars, PCs and Home Broadband

  Sony Revitalizes Smartphone Franchise with Movie-Style Screens

  China’s Tech Firms Are Mapping Pig Faces

  Court Ruling Could Help J&J Defeat St. Louis Talc Lawsuits

  Cullen Roche: Three Things I Think I Think – Buffett Letter Edition

  Michael Batnick: The Future of Real Estate

  Ben Carlson: Cherish Your Exceptions

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