Archive for August, 2019

• Morning News: August 30, 2019
  Eddy Elfenbein, August 30th, 2019 at 7:26 am

  Trump’s New Trade War Tool Might Just Be Antique China Debt

  Japan’s Curbs on High-Tech Materials Exports to South Korea Could Backfire

  Victory in Electric Cars Depends on Recycling. So Far, China’s Winning

  Trump’s Methane Rule Rollback Divides Oil and Gas Industry

  Builders Are Swapping Cement for Weed to Reduce Pollution

  India’s Restaurants Rebel Against Food Delivery Apps

  Uber, Lyft and DoorDash Pledge $90 Million to Fight Driver Legislation in California

  With Racing and Music Events, Tesla Gets Over Marketing Allergy in China

  Month of Bond Market Milestones – How Low Can You Go?

  15 Minutes to ‘Mayhem’: How a Tweet Led to a Shortage at Popeyes

  Joshua Brown: The Real Bubble Has Always Been in Active Management

  Ben Carlson: Will Millennials Get Destroyed During the Next Recession? & Animal Spirits: Best Case Recession

  Roger Nusbaum: A 75/50 ETF? & Plenty of Blame to Go Around

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• Morning News: August 29, 2019
  Eddy Elfenbein, August 29th, 2019 at 5:07 am

  Investors Pull Record Amount From Saudi Arabia ETF

  Bonds Reign Supreme, Equities Struggle on Recession, Brexit Fears

  Japan and South Korea Feud, but Breaking Up Is Hard

  A Windswept Plain, a Sea of Oil and a Mountain of Money

  Apple’s Data Shows a Deepening Dependence on China as Trump’s Tariffs Loom

  China Indicates It Won’t Retaliate Against Newest U.S. Tariffs

  Retailers Howl as U.S. Trade Agency Locks in 15% Tariffs on September 1

  UBS Sets Major Reshuffle Atop Wealth Management Unit

  Tesla Launches Insurance in California, Promising Savings and No Snooping

  Peloton Is a Phenomenon. Can It Last?

  Lord & Taylor Will Be Sold to Le Tote, a Clothing Rental Start-Up

  Popeyes Chicken Sandwich, Now A Sell-Out, Is A $65 Million Marketing Win

  Jeff Carter: Get Ready For More Candy Coated Unicorns

  Jeff Miller: Stock Exchange: Are You Growing Your Trading Knowledge Base?

  Michael Batnick: Animal Spirits: Best Case Recession & The Rise of Amazon

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• Morning News: August 28, 2019
  Eddy Elfenbein, August 28th, 2019 at 6:25 am

  Fake-Branded Bars Slip Dirty Gold into World Markets

  Chinese Currency’s Drop Isn’t Entirely in Beijing’s Control

  Rich Savers Take Another Hit in Denmark

  Pound’s Wild Ride Is Changing Everything on Britain’s High Street

  A Dollar Rising Into a Possible U.S. Recession Could Be a Bad Omen

  Facebook Tightens Rules on Verifying Political Advertisers

  Boeing CEO Eyes Major Aircraft Order Under Any U.S.-China Trade Deal

  BP to Exit Alaska With $5.6 Billion Sale

  Alaska Is the Biggest Bet Yet for Texas’s Anti-Shale Oil Billionaire

  Massive Crowds at China’s First Costco Force the Store to Shut Down Early

  Popeyes Chicken Sandwiches Are Sold Out Across the Country

  Former Star Google and Uber Engineer Charged With Theft of Trade Secrets

  Cullen Roche: Let’s Stop Talking About “Paying Off the National Debt”

  Roger Nusbaum: Are Factor Funds Hokum?

  Howard Lindzon: The App Constellation Strategy & Momentum Monday…He Huffed and He Puffed

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• Smucker’s Earnings Miss
  Eddy Elfenbein, August 27th, 2019 at 9:04 am

  Smuckers (SJM) is out with its earnings report this morning. The company earned $1.58 per share which came in below expectations of $1.74 per share.

  The CEO said:

  “Our first quarter performance fell short of our expectations primarily due to the timing of shipments and deflationary pricing in the coffee and peanut butter categories, as well as competitive activity in the premium dog food category,” said Mark Smucker, Chief Executive Officer.

  “We have continued momentum in many key product categories, and we are already taking decisive actions and prioritizing initiatives that strengthen our business. We remain confident in our strategy, which includes a continued focus on our growth imperatives to lead in the best categories, build brands consumers love, and be everywhere, combined with a relentless focus on operating with financial discipline, all of which will enhance shareholder value for the long term.”

  Now for their outlook.

  Net sales are expected to range from down 1 percent to flat compared to the prior year, which includes the loss of $105.9 million of sales in the first 4 months of fiscal 2019 related to the divested U.S. baking business and $25.4 million of incremental noncomparable sales for Ainsworth. On a comparable basis, net sales are expected to range from flat to up 1 percent.

  Adjusted earnings per share is expected to range from $8.35 to $8.55, based on 114.0 million shares outstanding. Earnings guidance reflects the reduced contribution from sales, gross profit margin of approximately 38.5 percent, and SD&A expenses declining slightly compared to the prior year.

  The previous forecast was $8.45 and $8.65 per share.

  SJM is down about 8% this morning.

• Morning News: August 27, 2019
  Eddy Elfenbein, August 27th, 2019 at 7:13 am

  Norway Wealth Fund Should Move More Investments to North America, Central Bank Says

  After 24 Hours, China Still Unaware of Calls Mentioned by Trump

  Trump Can Battle China or Expand the Economy. He Can’t Do Both.

  The Fed Shouldn’t Enable Donald Trump

  Here’s How Wildly Stocks Swing When Trump Mentions the Trade War

  Three U.S. Bond Kings Wield Same Strategy, Get Same Result: Lag Their Peers

  China Eases Rules on Cheap Drug Imports to Fight Chronic Diseases

  Johnson & Johnson Ordered to Pay $572 Million in Landmark Opioid Trial

  Cadillac’s Last Stand? Storied Brand Aims (Again) for Revival

  GlobalFoundries Sues TSMC, Wants U.S. Import Ban on Some Products

  KFC To Test Plant-Based ‘Meatless Chicken’ In Atlanta

  Nick Maggiulli: Skewed Expectations

  Ben Carlson: Re-Kindled: Amusing Ourselves To Death & Does the Stock Market Have a Say in the Presidential Election?

  Joshua Brown: ‘The Mandalorian’ Trailer Hits!

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• Decent New Home Sales Report
  Eddy Elfenbein, August 26th, 2019 at 11:43 am

  I wanted to touch on Friday’s report on new home sales. The numbers weren’t great, but they were good enough. This is probably better news for the economy than anything the yield curve says.

  These figures are very noisy and they bump around a lot. It’s important to look at the overall trend.

  The Commerce Department said Friday that new homes sold at a seasonally adjusted annual rate of 635,000 units. That’s down from a sharply revised upward rate of 728,000 in June. So far this year, sales have risen 4.1%, a sign that buyers are beginning to respond to lower mortgage rates.

  The volatility in home sales reflects broader uncertainty in the housing market. Buyers have been eager to take advantage of wage growth and historically-low mortgage rates. The average rate on a 30-year loan declined to 3.55% this week, according to mortgage buyer Freddie Mac. The revisions to the June figure, coupled with a rebound in existing home sales in July according to data released by the National Association of Realtors, show sales reacting largely well to lower borrowing costs.

  The mortgage market is helping. This year will probably be the best year for new home sales since 2007.

  Don’t let negative news about the economy overwhelm you. There’s still a lot left in the current economic cycle.

• Morning News: August 26, 2019
  Eddy Elfenbein, August 26th, 2019 at 7:07 am

  Japan Denies it Gave Trump Too Much in Trade Talks

  Gold Steadies as Trump Ratchets Down China Trade Tension

  Oil Rises on Hopes of Easing U.S.-China Trade Tension

  Corporate America Sounds Alarm on Trump’s Threats Over China

  Trump Faces a Stubborn Opponent in Fed’s Economic Experts

  Fund Manager Who Beat 98% of Peers Says Stay Calm and Buy Stocks

  Nissan Got Rid of Carlos Ghosn. The Way It Did So May Prove Costly.

  Iceland’s Purple Planes Are Grounded, and With Them, Its Economy

  Amgen to Buy Celgene’s Psoriasis Drug Otezla for $13.4 Billion in Cash

  The $6 Million Drug Claim

  Tesla to Raise Prices in China on August 30, May Increase Again in December

  Dorm to Table: College Start-Ups Take Aim at Food Industry

  Michael Batnick: Calibrating Your Risk Tolerance

  Cullen Roche: Black Hole Monetary Economics

  Jeff Miller: Weighing the Week Ahead: Can Feedback Alter Trump’s Course?

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• CWS Market Review – August 23, 2019
  Eddy Elfenbein, August 23rd, 2019 at 7:08 am

  “Losing an illusion makes you wiser than finding a truth.” – Ludwig Borne

  After the stock market reached an all-time high on July 26, the S&P 500 fell for six days in a row. Fears about the trade war and China and the yuan combined to knock 6% off the stock market in those six days.

  This is the 25th correction of more than 5% in this bull market dating back to March 2009. All 24 of the previous drops failed to turn into bear markets. I strongly suspect this will eventually become #25, but at some point, the streak will end. The good news is that the market has calmed down over the last few days.

  

  On our Buy List, we had impressive earnings reports from Hormel Foods and Ross Stores. I’ll cover that in a bit. The outlook from Ross was a bit light due to the tariffs with China. Later on, I’ll preview next Tuesday’s earnings report from Smucker. That will be our last earnings report for some time. But first, let’s take a closer look at the divided economy.

  The Consumer Is Healthy but Factories Are Not

  In last week’s CWS Market Review, I mentioned how there’s a growing divergence in the U.S. economy. The consumer sector is doing just fine. Consumer spending is rolling along. Retail sales are doing well. This week, in fact, shares of Target jumped 20% after the company’s earnings report.

  The industrial sector, however, has hit the skids. The numbers on manufacturing have been pretty sluggish. We can also see this divide in the stock market. I’m often asked when the stock market will finally break. In one respect, it’s already broken down. If we measure from late January 2018, then the stock market hasn’t done that well, especially compared with alternatives such as bonds or gold.

  Since January 26, 2018, the S&P 500 is up just 1.74%. That’s nothing. It’s as if we had a silent bear market and no one noticed. The market didn’t plunge 20%, but we’ve barely moved over a period when the stock market averages about 20%, give or take. It’s not exactly the same, but there are some similarities.

  Not only that, but we can see the effect within the stock market. There’s the defensive side of the market. That includes Consumer Staples, Utilities and Real-Estate Investment Trusts (REITs). These stocks have done fairly well. All those sectors are near new 52-week highs. These stocks are sometimes called Low Volatility stocks because they’re far more stable than other shares. On our Buy List, this includes stocks like Church & Dwight (CHD) and Hershey (HSY). Chocolate and condoms aren’t going to be terribly impacted by a recession.

  This chart shows how the three defensive sectors have outpaced the S&P 500 (in purple) for several months.

  

  At the other end of the market, you have cyclical stocks. This includes sectors like Energy, Materials, Industrials and Financials. These stocks have not done well at all. In particular, the plunge in the Energy sector is remarkable. The S&P 500 Energy sector is still more than 40% below its high from five years ago. The scars from the recession are still visible. The S&P Bank Index is lower than where it was over 20 years ago.

  Part of our success this year compared with the market is that the Buy List is skewed toward these defensive areas. That wasn’t a macro call on my part. Most any portfolio will lean in one direction or another even without trying. This year we’ve been fortunate enough to catch the tailwind helping defensive sectors.

  I’m not fully convinced that the economy is in trouble, the inverted yield curve aside. Historically, an inverted yield curve can presage a recession by as much as two years. Also, with rates already so low, perhaps the indicator isn’t as reliable as it once was.

  The important variable to watch is the housing market, and that’s moving along. This week’s report on existing-home sales was above expectations. Lower mortgage rates are playing a big role here. As long as the housing market remains healthy, it’s very hard for the economy to fall into a recession.

  In fact, Edward Leamer, a well-known economist and econometrician, wrote a piece called “Housing IS the Business Cycle” arguing that housing is central to the overall economy. This isn’t due to its size but due to its cyclical nature.

  Any Fed rate cuts for the rest of this year probably won’t have the stimulating impact that the recent decline in mortgage rates has had and will have later this year.

  For now, investors should make sure their portfolios have plenty of defensive stocks and stocks with generous dividends. On the Buy List, Check Point Software (CHKP) looks quite good now. I also like Becton, Dickinson (BDX). If you’re more speculative, then Eagle Bancorp (EGBN) is worth a look. Now let’s check out this week’s earnings reports.

  Earnings from Hormel Foods and Ross Stores

  We had two Buy List earnings reports this week. On Thursday morning, Hormel Foods (HRL) reported fiscal Q3 earnings of 37 cents per share. That was one penny better than expectations.

  In many ways, this earnings report was a big sigh of relief. Hormel’s numbers weren’t outstanding, but they were good enough. I think some investors had pretty low expectations, so Hormel proved that things are mostly okay.

  

  In May, the Spam folks lowered their full-year guidance due to African swine fever and other issues. I think that rattled investors. Fortunately, there was no lower guidance this time. Instead, Hormel stood by its full-year forecast for earnings of $1.71 to $1.85 per share.

  Since Hormel has already earned $1.33 through the first three quarters, the guidance implies a range for fiscal Q4 of 38 to 52 cents per share. Wall Street had been expecting 45 cents per share. Hormel also sees full-year sales of $9.5 billion to $10 billion.

  For Q3, Hormel’s operating margin was 11.2% which is up from 10.9% a year ago. That’s a good sign. Shares of HRL rallied 4.8% on Thursday, and we now have a slight gain on the year. I’m cautiously raising my Buy Below on Hormel Foods to $46 per share.

  After the bell on Thursday, Ross Stores (ROST) reported fiscal Q2 earnings of $1.14 per share. That was above their guidance range of $1.05 to $1.11 per share. Quarterly sales were up 6% to $4.0 billion. The all-important comparable-store-sales figure was up 3%. Ross had projected growth of 1% to 2%.

  Barbara Rentler, ROST’s CEO, said, “We delivered respectable gains in both sales and earnings for the second quarter. While our Ladies business continued to trail the chain, trends in this important area showed some improvement during the period. Operating margin of 13.7% was better than expected, mainly due to favorable timing of expenses that are expected to reverse in the second half.”

  Now for guidance. Ross sees comparable-store sales growth of 1% to 2% for Q3 and Q4. However, because of the trade war with China, Ross is adjusting its second-half guidance. Ross now expects Q3 earnings of 92 to 96 cents per share. Wall Street had been expecting $1 per share. For Q4, which is their biggest, Ross sees earnings of $1.20 to $1.25 per share. Wall Street had been expecting $1.24 per share.

  That adds up to full-year guidance of $4.41 to $4.50 per share which is narrower than the previous guidance of $4.38 to $4.52 per share. Despite the tariff issues, Ross continues to do very well. Remember that they like to low-ball their guidance. I’m raising my Buy Below on Ross Stores to $113 per share.

  Earnings Preview for Smuckers

  We’ll get the last of our August earnings reports next Tuesday when Smuckers (SJM) reports. The jelly stock started off very strongly for us this year but hasn’t done much this summer.

  That’s a shame because in June, the company released a strong earnings report. For Q4, Smucker earned $2.08 per share. That was 13 cents better than Wall Street had been expecting.

  Smucker also provided guidance for the current fiscal year. The company expects sales growth of 1% to 2% and earnings ranging between $8.45 and $8.65 per share. That’s a bold forecast. Wall Street had been expecting $8.33 per share.

  The company has worked to integrate the recent purchase of Ainsworth. The core brands are performing well. The pet-food business is also holding up. For Tuesday, Wall Street expects $1.74 per share.

  Buy List Updates

  There are a few Buy List updates I have for you. Shares of AFLAC (AFL) got dinged on Wednesday after the Japan Times said that Japan Post “improperly sold around 104,000 insurance policies issued by U.S. partner Aflac Inc.”

  AFLAC had partnered with Japan Post to sell AFLAC’s policies, but Japan Post double-charged some customers or left others uninsured. Japan Post said it will stop selling third-party insurance products but it will make an exception for AFLAC’s cancer products.

  AFLAC issued a press release to address the issue. I don’t expect this will be a major issue. Shares of AFLAC lost more than 5.5% on Wednesday. Don’t let this concern you. AFLAC is a very strong company.

  Shares of Disney (DIS) dropped about $3 per share just before the closing bell on Monday. A whistleblower had told the SEC that Disney has been inflating its revenue for years. A long-time analyst with the company said they had overstated the amount of revenue the parks were taking in.

  I can’t judge the merits of the accusation. Disney said they had reviewed the matter and found no wrongdoing. Following Monday’s quick drop, shares of Disney seem to have moved on. Disney remains a solid buy.

  Before I go, I want to adjust a few of our Buy Below prices. Fiserv (FISV) continues to look very strong since its last earnings report. The company beat expectations, reiterated guidance and completed the big deal with First Data. This week, I’m lifting our Buy Below on Fiserv by $10 to $113 per share. Hershey (HSY) has also performed well since its earnings report. I’m lifting my Buy Below on HSY to $162 per share.

  That’s all for now. There will be no newsletter next week. I’m on the road ahead of Labor Day. Next week is the final trading week of August. On Monday, we’ll get the latest report on durable goods. The data here have been pretty weak lately. Then on Tuesday, the report on consumer confidence will be released. On Thursday, the government will update its report on Q2 GDP growth. The initial report said that the U.S. economy grew in real terms by 2.1% last quarter. That’s right in line with the average for the last 10 years. 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

• Morning News: August 23, 2019
  Eddy Elfenbein, August 23rd, 2019 at 7:05 am

  G-7 Is Well Timed to Fight Recession But Leaders Unlikely to Act

  The Trade War Is Creating a Windfall for Rivals of U.S. Soy in China

  Protest Fears Stalk Hong Kong Businesses as China Threat Looms

  Powell, Carney to Speak at Jackson Hole But Draghi, Kuroda Skip

  YouTube Disables 210 Channels That Spread Disinformation About Hong Kong Protests

  Huawei Says U.S. Curbs to Cut Smartphone Unit’s Revenue by Over $10 Billion

  Recession or Not, a Payroll Tax Cut Would Be a Bad Move. It Could Hurt Social Security.

  Apple and Goldman Sachs Launch Their Credit Card

  Phone Companies Ink Deal With All 50 States And D.C. To Combat Robocalls

  The Cursed Legacy of the Most Expensive Plot of Land in Los Angeles

  Many Are Abandoning Facebook. These People Have the Opposite Problem.

  Patrick Byrne, Overstock C.E.O., Resigns After Disclosing Romance With Russian Agent

  Ben Carlson: When the Short-Term Impacts the Long-Term: Are We There Yet?

  Howard Lindzon: Greedy, Sloppy, Silly …The IPO Market of 2019 Continues

  Jeff Carter: Crypto and Bear Markets

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• Hormel Foods Earns 37 Cents per Share
  Eddy Elfenbein, August 22nd, 2019 at 12:43 pm

  This morning Hormel Foods (HRL) reported fiscal Q3 earnings of 37 cents per share. The company also reiterated their full-year guidance of $1.71 to $1.85 per share.

  Hormel has already made $1.33 per share for the first three quarters. That means they expect 38 to 52 cents per share for Q4. Wall Street had been expecting 45 cents per share.

  EXECUTIVE SUMMARY

  Volume of 1.1 billion lbs., down 4%; organic volume1 down 1%
  Net sales of $2.3 billion, down 3%; organic net sales1 flat
  Pretax earnings of $261 million, up 1%
  Operating margin of 11.2% compared to 10.9% last year
  Effective tax rate of 23.6% compared to 18.4% last year
  Diluted earnings per share of $0.37, down 5% due to a higher effective tax rate
  Year-to-date cash flow from operations of $573 million, down 23% due to higher working capital
  Fiscal 2019 earnings guidance reaffirmed at $1.71 to $1.85 per share

  COMMENTARY

  “We delivered earnings in line with our expectations this quarter as our experienced management team reacted quickly and appropriately to rapidly changing market conditions,” said Jim Snee, chairman of the board, president and chief executive officer. “Disciplined pricing, strategic promotional activity, effective advertising and insight-led innovation all played a positive role in our performance. The fundamentals of our company are strong, and we remain focused on delivering our key results as we navigate near-term commodity market uncertainty.”

  “Innovative branded product lines such as Hormel® Bacon 1™ cooked bacon, Hormel® Fire Braised™ products, SKIPPY® P.B. & Jelly Minis, and Herdez® salsas all delivered strong sales growth,” Snee said. “Our team also grew sales across many core brands such as SPAM®, Dinty Moore®, Mary Kitchen® and Old Smokehouse®.”

  “Double-digit earnings growth in Refrigerated Foods offset weaker results in Grocery Products,” Snee said. “Refrigerated Foods effectively managed sales growth and profitability in the midst of volatile input costs caused by African swine fever. Many of our established brands in Grocery Products continue to outpace center store growth. However, the disappointing bottom-line performance for Grocery Products was driven by higher avocado costs in our MegaMex joint venture and lower results for our SKIPPY® peanut butter spreads business.”

  “The Jennie-O Turkey Store team is working diligently to regain lean ground turkey distribution following the two voluntary product recalls,” Snee said. “Our International team made progress growing the SPAM® and SKIPPY® brands in China while U.S. exports continue to be impacted by global trade uncertainty.”

  OUTLOOK

  “We are reaffirming our fiscal 2019 earnings guidance range,” Snee said. “While we have yet to see sustained higher pork prices due to African swine fever, we have seen input cost volatility and are expecting further volatility. The Refrigerated Foods team has proven its ability to operate in various market conditions with a continued focus on value-added growth, disciplined pricing and innovation. Earnings pressure from higher avocado prices and peanut butter category dynamics will continue to impact results in Grocery Products in the fourth quarter.”

  “Our experienced management team will continue to leverage our company’s long-term strategy of building brands, innovating, making strategic acquisitions and increasing balance in our business to deliver long-term growth,” Snee said.