Archive for July, 2019

• Morning News: July 17, 2019
  Eddy Elfenbein, July 17th, 2019 at 7:21 am

  EU Says It Will Investigate Amazon Over Possible Anti-Competitive Business Practices

  How Lithium-Rich Chile Botched a Plan to Attract Battery Makers

  U.S. Justice Department Asks Appeals Court to Pause Antitrust Ruling Against Qualcomm

  A $51 Billion Manager Says Markets Are Wrong to Cheer Fed Cuts

  Technology Supplier to U.S. Police Agencies Bans Chinese Drones

  ‘I Don’t Trust You Guys’: Lawmakers Unite to Take Aim at Big Tech

  Making Sense of Chaos? Algos Scour Social Media for Clues to Crypto Moves

  Despite High Hopes, Self-Driving Cars Are ‘Way in the Future’

  Elon Musk’s Neuralink Says It’s Ready for Brain Surgery

  Amazon in EU Antitrust Spotlight Over Use of Merchant Data

  Bitcoin Loses Almost a Third of Its Value as Libra Hype Fades

  Bill Gates Loses His Spot as World’s Second-Richest Man

  Nick Maggiulli: Losing Dollars vs. Losing Percentages

  Ben Carlson: A Lesson in Portfolio Correlations

  Joshua Brown: How I Invest My Own Money

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• FactSet Downgraded By Morgan Stanley
  Eddy Elfenbein, July 16th, 2019 at 2:17 pm

  From Benzinga:

  The Analyst

  Morgan Stanley’s Toni Kaplan downgraded FactSet Research Systems from Equal-Weight to Underweight, while reducing the price target from $264 to $263.

  The Thesis

  FactSet Research Systems’ stock has appreciated around 47% year to date, outperforming Morgan Stanley’s Analytics coverage average and the S&P 500, Kaplan said in the downgrade note.

  Most of the share price rally has been driven by multiple expansion, with investors seeking high quality stocks, the analyst mentioned. He expressed concern, however, regarding the company’s earnings growth prospects.

  Kaplan mentioned that FactSet’s EPS growth in 2020 may fall to the lowest that the company has generated in the last four years. This is expected due to moderating annual subscription value (ASV), along with lower margin expansion.

  While ASV growth at Research, which accounted for 46% of 2018 ASV, could turn negative, pricing pressure is expected to intensify with growing competition, the analyst said.

  Following the share price rally, FactSet’s stock now trades at a premium to many Analytics stocks that have better growth prospects.

  The stock has been down as much as 4.9% today.

  

• Retail Sales and Industrial Production
  Eddy Elfenbein, July 16th, 2019 at 11:51 am

  This morning, we got two economic reports. The retail sales report for June was quite good. The Commerce Department said retail sales rose 0.4% last month. The numbers for May were revised down to 0.4% from 0.5% growth. Excluding automobiles, gasoline, building materials and food services, retail sales jumped 0.7% last month.

  June’s strong gain in core retail sales, coming on the heels of solid increases in April and May, suggested a sharp acceleration in consumer spending in the second quarter.

  Consumer spending grew at its slowest pace in a year in the first quarter. Spending is being supported by a tight labor market, even as the broader economy is slowing as weaker business investment, an inventory overhang, a trade war between the United States and China, and softening global growth pressure the manufacturing sector.

  The data probably will have little impact on market expectations that the Federal Reserve will cut interest rates this month for the first time in a decade. But signs of strong consumer spending and rising core inflation suggest the U.S. central bank is unlikely to cut rates by 50 basis points at its July 30-31 policy meeting as markets had initially anticipated.

  The industrial production report for June was flat. Economists were expecting an increase of 0.2%. Production for manufacturing and mining increased but that was erased by the decline in utilities.

  Capacity utilization, which reflects how much industries are producing compared with what they could potentially produce, slipped by 0.2 percentage point to 77.9% in June. Economists had expected 78.1%.

  Industrial production has struggled this year, due in part to trade-related headwinds. For the second quarter as a whole, industrial production declined at a 1.2% annual rate, dropping for the second quarter in a row.

  Broader economic growth was strong in the first quarter and the labor market has continued to add jobs.

• Morning News: July 16, 2019
  Eddy Elfenbein, July 16th, 2019 at 7:07 am

  Christine Lagarde Faces a New Challenge in Europe

  China Says Trump ‘Misleading’ People Linking Trade Deal, Slowing Economy

  Tariffs on China Don’t Cover the Costs of Trump’s Trade War

  Powell Concession on Too-Tight Fed Underlines Shift Toward Cuts

  Wall Street Finds Blockchain Hard to Tame After Early Euphoria

  Why (Almost) Everybody Hates Facebook’s Cryptocurrency Libra

  Citigroup and Other Banks Are Buying Back Their Stocks and That’s Good for Earnings

  Amazon Prime Day Brings Sales, and Risks, for Retailers

  Tesla Drops Cheapest Model X, S Variants, Cuts Prices to Simplify Lineup

  Boeing Max Crisis Hits 2020 Airline Growth as Ryanair Pares Plan

  Nestle Creates New Chocolate—With No Added Sugar

  Arby’s Has an Answer to Plant-Based Meat: A Meat-Based Carrot

  Cullen Roche: My View On: ESG Investing

  Michael Batnick: Animal Spirits, Talk Your Book: Agricultural Commodities

  Joshua Brown: Everyone Deserves Good Financial Advice. Everyone.

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• Morning News: July 15, 2019
  Eddy Elfenbein, July 15th, 2019 at 7:06 am

  Japan, Taking a Page From Trump, Uses Trade Against South Korea

  China’s Economic Growth Hits 27-Year Low as Trade War Stings

  U.S. Firms May Get Nod to Restart Huawei Sales In Two-Four Weeks

  Philippine Stocks Propelled Into Bull Market

  Peter Thiel Urges U.S. Probe of Google’s ‘Seemingly Treasonous’ Acts

  S&P 3,300 – The Bull Vs. Bear Case

  ‘The Town Hall of Hollywood.’ Welcome to the Netflix Lobby.

  Why Budweiser and Bankers Failed to Sell the King of IPOs

  More to Come: FTC Fine Doesn’t Spell Closure for Facebook

  Gilead to Boost Stake in Belgian Biotech Galapagos as Part of $5.1 Billion Deal

  America’s Youth Think They Can Save the World and Get Rich

  The Wealthiest 1% Can Be Good for Everybody

  Jeff Miller: Weighing the Week Ahead: How Much Has Economic Weakness Hurt Corporate Earnings?

  Jeff Carter: The Creative Class

  Ben Carlson: Lessons From the 10 Best Years in Stock Market History & What’s in the box!? (The 7 Deadly Sins of Investing)

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• CWS Market Review – July 12, 2019
  Eddy Elfenbein, July 12th, 2019 at 7:08 am

  “We don’t have any basis, or any evidence, for calling this a hot labor market.”
  – Jerome Powell

  Future historians will note that on Wednesday, July 10 at 9:50 a.m. ET, the S&P 500, for the first time ever, broke through 3,000.

  Sure, it fell back again, but it really did happen. Then on Thursday, the Dow broke above 27,000.

  What was the cause of this latest rally? That came in the form of Fed Chairman Jay Powell. The Fed head spoke before Congress this week and strongly hinted that the Fed was ready to lower interest rates. How many times is still not known, but Wall Street is pleased with the news. Since June 3, the S&P 500 is up over 9%.

  

  In this week’s CWS Market Review, I’ll go over the latest from the Fed. Also, earnings season is upon us. We have our first Buy List earnings reports coming next week. I’ll preview what’s in store.

  The Fed Signals It’s Ready to Cut Rates

  Last Friday, shortly after I sent you last week’s issue, the government reported that the U.S. economy created 224,000 net new jobs in June. That was an impressive figure, and it was higher than Wall Street had been expecting. The unemployment rate rose a tick to 3.7%.

  On Thursday, we got a CPI report that was a bit higher than expected. The government said that inflation rose 0.1% last month, while the “core rate,” which ignores food and energy, rose by 0.3%. That was the highest jump for core inflation since early 2018.

  Also on Thursday, the jobless-claims report fell to 209,000. That’s the lowest in three months.

  Taking these three news items together, it appears that the labor market is doing well, and there may be cost pressures building in the economy.

  This seems to have had zero effect on the Federal Reserve and its plans for interest rates. This week was the Humphrey-Hawkins testimony. This is the law that requires that the Chairman of the Federal Reserve to go to Capitol Hill twice a year to testify before the House and Senate Committees.

  (Years ago, I used to go to these. Once I got the coveted the seat directly behind Bernanke.)

  The chairman was asked directly if he thought the labor market was running hot. He said, “We don’t have any basis, or any evidence, for calling this a hot labor market.” That’s unusually frank language for a Fed chair. They’re trained to speak in Obfuscation.

  Also this week, we got the minutes from the Fed’s June meeting. They seemed to indicate a growing consensus at the Fed for an interest-rate cut.

  Consequently, on Thursday, the Dow, Nasdaq and S&P 500 all closed at record highs. The unemployment rate is near a 50-year low, and the Fed is ready to rescue us. I have to admit that I don’t see the need for a rate cut right now. I thought the December hike was a mistake, so I suppose I can see one rate cut. Wall Street, however, sees a string of rate cuts coming our way. According to the futures markets, there’s a 100% chance of a cut at the end of this month. It’s hard to get more certain than that.

  That’s not all. Traders think there’s a 70% chance of another cut in September, plus a third rate cut in December. That could be right. Chairman Powell said, “we hear lots of reports of companies having a hard time finding qualified labor; nonetheless, we don’t really see wages responding.”

  One concern is that if the Fed doesn’t cut, then it would be out of alignment with monetary policy in Europe. The European Central Bank may start a new round of bond buying. In fact, the ECB may soon cut interest rates again, which are already negative. Inflation expectations have plunged in Europe.

  Here’s an interesting chart. The blue line is the real Fed funds rate based on core inflation. The red line is the year-over-year growth in nonfarm payrolls. These two lines had a fairly moderate correlation that was broken apart by the last recession.

  

  Can the Fed cut rates when the market is near an all-time high? Ryan Detrick ran the numbers and found that since 1980, the Fed has cut rates 17 times when the S&P 500 was within 2% of a new high. One year later, the market was higher all 17 times.

  One of the good aspects of our style of investing is that we don’t need to predict Fed policy. While I find the Fed’s plans to be stronger than necessary, they don’t alter our basic approach. The important takeaways are that lower short-term rates are mostly bullish for the stock market. Lower short rates usually allow for higher equity valuations. Indeed, that probably explains why the market jumped to new highs this week.

  There are also important internal changes to the market. When short-term rates fall, high-dividend stocks are more appealing. We can certainly see that effect in our portfolio. Conversely, financial stocks tend to lag as rates fall. (Please note that I’m speaking in very general terms.)

  This week has been a good one for our Buy List. We’re up more than 22% this year. But second-quarter earnings season is about to start. Let’s take a closer look.

  Second-Quarter Earnings Preview

  There’s hasn’t been a lot of news about our stocks recently. Mostly, it’s been a broad rally, and several of our stocks have made new 52-week highs. On Thursday, both Cerner (CERN) and Moody’s (MCO) made new highs. Both stocks are up over 40% for us this year and have a chance of dethroning FactSet (FDS) as our top performer this year.

  Here’s a list of our stocks, the reporting date and Wall Street’s consensus. I have to include my typical warning that these dates and numbers sometimes change. Some companies are, shall we say, not overly forthcoming when it comes to shareholder communication.

  Company	Ticker	Date	Estimate
  Eagle Bancorp	EGBN	17-Jul	$1.12
  Danaher	DHR	18-Jul	$1.16
  RPM International	RPM	22-Jul	$1.14
  Sherwin-Williams	SHW	23-Jul	$6.40
  Torchmark	TMK	24-Jul	$1.65
  Check Point Software	CHKP	24-Jul	$1.37
  Cerner	CERN	24-Jul	$0.64
  Stryker	SYK	25-Jul	$1.94
  AFLAC	AFL	25-Jul	$1.07
  Hershey	HSY	25-Jul	$1.17
  Raytheon	RTN	25-Jul	$2.64
  Moody’s	MCO	31-Jul	$2.00
  Church & Dwight	CHD	31-Jul	$0.52
  Cognizant Technology Solutions	CTSH	31-Jul	$0.92
  Intercontinental Exchange	ICE	1-Aug	$0.93
  Disney	DIS	6-Aug	$1.76
  Becton, Dickinson	BDX	6-Aug	$3.07
  Signature Bank	SBNY	TBA	$2.71
  Fiserv	FISV	TBA	$0.81
  Continental Building Products	CBPX	TBA	$0.52
  Broadridge Financial	BR	TBA	$1.71

  I want to cover two earnings reports scheduled for next week.

  Eagle Bancorp (EGBN) is due to report on Wednesday, July 17. Three months ago, the bank missed earnings by one penny per share. I’m not too concerned by that.

  Eagle is currently going through a transition after the former CEO, Ron Paul, announced his retirement. Susan G. Riel had been the interim President and CEO, and now she’s taken those positions permanently.

  About the Q1 results, Riel said, “The Company’s assets ended the quarter at $8.39 billion, representing 9% growth over the first quarter of 2018. First-quarter 2019 earnings resulted in a return on average assets of 1.62% (1.85% excluding nonrecurring costs as defined above) and a return-on-average tangible common equity of 13.38% (15.26% excluding nonrecurring costs as defined above).”

  For Q2, Wall Street expects earnings of $1.12 per share. EGBN is currently going for just over 11 times next year’s earnings estimate.

  Danaher (DHR) is scheduled to report its earnings the following day, on July 18. Three months ago, Danaher reported Q1 earnings of $1.07 per share. That was three cents more than estimates.

  Danaher has been quite busy this year. The company is buying GE’s biopharma business for $21.4 billion. Danaher said it expects Q2 earnings to range between $1.13 and $1.16 per share. The company lowered its full-year guidance. The previous range was $4.75 to $4.85 per share. The new range is $4.72 to $4.80 per share. This reflects the share dilution to buy GE Biopharma. The deal should close sometime in Q4.

  Sometime in the second half of this year, Danaher will IPO Envista Holdings, which is their dental business. The ticker symbol will be NVST. Shares of DHR hit a new 52-week high last week.

  I’m also going to include Signature Bank (SBNY). The bank hasn’t said yet when it will report earnings, but going by previous years, July 18 is a good candidate.

  Signature may be one of our most frustrating stocks to own. The stock seems to move in big streaks. SBNY was a 30% winner for us this year by February 11. After that, it started to lag. Fortunately, SBNY is on the rise again.

  

  Three months ago, the shares got dinged after the bank missed estimates by 12 cents per share. For Q2, Wall Street expects earnings of $2.71 per share. The stock is currently going for about ten times next year’s earnings. With the earnings report, the bank may increase its dividend as well.

  That’s all for now. In addition to earnings reports, there are some key economic reports next week. On Tuesday, we’ll get the latest report on retail sales and industrial production. Then on Wednesday, the report on housing starts is released. Thursday is jobless claims, and Friday is consumer confidence. We’ll also get an update on the budget for this year. 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. Next Friday, July 19, I’ll be on Bloomberg TV’s market wrap segment at 4 p.m. Tune in!

• Morning News: July 12, 2019
  Eddy Elfenbein, July 12th, 2019 at 7:04 am

  France Moves to Tax Tech Giants, Stoking Fight With White House

  Beijing Signals Talks at Early Stage as Trump Vents Frustration

  Jerome Powell Is Becoming Central Banker to the World

  This Could Be a Rare Time When It’s Smart to Fight the Fed

  Bond Returns Have Been Spectacular. Don’t Count on a Sequel.

  Buying Lattes Is Not Keeping You From Being Rich

  Amazon Plans High-End Echo, Ramps Up Work on Alexa Home Robot

  As Nations Look to Tax Tech Firms, U.S. Scrambles to Broker a Deal

  Volkswagen to Contribute $2.6 Billion to Ford’s Autonomous Venture

  Daimler Warns on Profit Again, Blames Diesel and Recall Costs

  Accenture Picks Julie Sweet as Chief Executive

  Bed Bath & Beyond Is Circling the Drain

  Jeff Miller: Stock Exchange: Are You Guilty Of Risk Creep?

  Howard Lindzon: The Tariff Man

  Ben Carlson: Trends That May End With The Baby Boomers

  Be sure to follow me on Twitter.

• Surprising Jump in Core CPI
  Eddy Elfenbein, July 11th, 2019 at 11:55 am

  This time it’s the Dow’s turn to break a milestone. The index broke through 27,000 this morning. Jay Powell testifies again today but this time before the Senate.

  This morning’s CPI report said that inflation rose 0.1% in June. Economists were expecting no change.

  However, core inflation rose by 0.3%. That’s the biggest monthly increase since January 2018.

  The so-called core CPI was boosted by strong increases in the prices for apparel, used cars and trucks, as well as household furnishings.

  There were also increases in the cost of healthcare and rents. In the 12 months through June, the core CPI climbed 2.1% after advancing 2.0% in May.

  The overall CPI edged up 0.1% last month, held back by cheaper gasoline and food prices. The CPI rose 0.1% in May. It increased 1.6% year-on-year in June after rising 1.8% in May.
  Economists polled by Reuters had forecast the CPI unchanged in June and rising 1.6% year-on-year.

  The Fed, which has a 2% inflation target, tracks the core personal consumption expenditures (PCE) price index for monetary policy. The core PCE price index increased 1.5 percent year-on-year in May and has undershot its target this year.

• Morning News: July 11, 2019
  Eddy Elfenbein, July 11th, 2019 at 7:07 am

  Central Banker With Too Much Gold Wants Treasuries Instead

  The Nordic Model May Be the Best Cushion Against Capitalism. Can It Survive Immigration?

  Bleak China Autos Outlook Triggers Raft of Profit Warnings

  U.S. Announces Inquiry of French Digital Tax That May End in Tariffs

  China and U.S. Differ Over Agricultural Purchases Trump Boasted About

  What Powell’s Rate Cut Signal Means for China’s Central Bank

  Wall Street Banks Bailing on Troubled U.S. Farm Sector

  Want to Profit From a Trade War? There’s an Investment Fund for That

  As Fresh Water Grows Scarcer, It Could Become a Good Investment

  Deutsche Bank Faces U.S. Justice Department Probe Over 1MDB

  Reckitt to Pay $1.4 Billion to End Opioid Addiction Treatment Probes

  Now Fruit Juice Is Linked to a Higher Cancer Risk

  Jeff Carter: New Security Token on Open Finance Platform

  Cullen Roche: Will Active ETFs Save Active Management?

  Roger Nusbaum: Is Maximum Optionality The Most Important Gift You Can Give Yourself?

  Be sure to follow me on Twitter.

• The S&P 500 Breaks 3,000
  Eddy Elfenbein, July 10th, 2019 at 11:55 am

  For a brief moment this morning, the S&P 500 broke 3,000. Of course, this is an arbitrary number, but it’s worth reflecting on the market’s stunning climb. Ten years ago, the index was around 900. For context, the S&P 500 broke 30 on August 16, 1929 (this was the old S&P 90). The S&P 500 broke 300 on March 23, 1987.

  Fed Chairman Jay Powell testified today before the House Financial Services Committee. Tomorrow, he’ll go before the Senate. His comments have been interpreted as being dovish. In other words, the Fed may cut at the end of this month. That’s good for stocks and it’s why we’re up today.

  

  The Fed also released the minutes from their June meeting. These were largely seen as helping the case that the Fed will soon cut rates. The futures market currently thinks there’s a 100% chance the Fed will cut in three weeks. There’s another 73% chance that the Fed will cut again in September. (And a third cut by Christmas!)