Archive for August, 2019

• Talking with Tobias
  Eddy Elfenbein, August 14th, 2019 at 7:00 pm

  Tobias Carlisle was kind enough to invite me on his podcast. I had a lot of fun chatting about the market and all things investing.

• The 2/10 Spread Inverts
  Eddy Elfenbein, August 14th, 2019 at 10:54 am

  For the first time in more than a decade, the yield on two-year Treasuries is greater than the yield on ten-year Treasuries. As someone who has written a lot about the 2/10 Spread, it’s odd to see it in the headlines today. It even made Drudge.

  I also find myself in the unusual spot of telling people to relax a bit. A 2/10 inversion is not a good thing, but it’s not exactly a tripwire. Historically, inversions precede recessions by as long as two years. We had an inversion in the late 1990s when the economy was doing very well.

  What it means is that people are getting paid to take on more risk. As a result, people won’t take on more risk. That can be bad for the market since it lives off the backs of risk-takers.

  People are also concerned about the stock market falling. But the stock market has been falling, just quietly. Going back to early 2018, many sectors of the market haven’t done that well. Finance, Energy, Materials have all done poorly. It just didn’t get a lot of attention. The “high beta” sector is in a technical correction. The 30-year Treasury is at a record low.

• Morning News: August 14, 2019
  Eddy Elfenbein, August 14th, 2019 at 7:06 am

  Yield Curves Invert in U.S., U.K. as `Doom and Gloom’ Spreads

  German Economic Reversal Piles Pressure on Merkel for Stimulus

  Resilient East EU Shows Slumping West That Stimulus Can Work

  China’s Economy Worsens in July, Industrial Growth at 17-year Low as Trade War Escalates

  Lower Fees, Snazzy Branches: Hong Kong Banks Gird for Online-Only Onslaught

  U.S. Delays Some China Tariffs Until Stores Stock Up for Holidays

  Trump 2020 Rust Belt Pitch Threatened by Manufacturing Recession

  FTC Chief Says He’s Willing to Break Up Big Tech Companies

  CBS, Viacom Reunite with Plans for Bigger Role in Streaming TV Wars

  The Rise of the Virtual Restaurant

  The USDA Dropped a Corn Bombshell. What It Means for Deere and Other Stocks.

  It’s Hot. It’s August. It’s … Pumpkin Spice Time?

  Nick Maggiulli: The Seduction of Above Average

  Ben Carlson: The Impact of Interest Rates & Inflation on Stock Market Valuations

  Jeff Carter: Small Investors on The Capitalization Table

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• Morning News: August 13, 2019
  Eddy Elfenbein, August 13th, 2019 at 7:34 am

  Hong Kong Airport Suspends Check-Ins in Second Day of Protest Chaos

  Yuan at Right Level, Disorderly Capital Flows Unlikely – China Central Bank Official

  As Saudis and Indians Grow Closer, a $15 Billion Deal Blooms

  Argentina’s Fernandez Says He Doesn’t Want to Default on Debt

  Volcker Revamp to Ease Banks’ Trading Rules, Path to Investments

  Trump’s Push to Bring Back Jobs to U.S. Shows Limited Results

  It’s Another Rocky August in the Markets. Does It Look Like 1998, or 2007?

  The Phony Patriots of Silicon Valley

  Google’s Jobs Search Draws Antitrust Complaints from Rivals

  As Barneys Struggles, Fashion Vendors Try on Alternative Channels

  European Blockchain Company Bitfury Launches Artificial Intelligence Unit

  Nike Has Taken a Page Out of the Tech Industry’s Playbook. Here’s Why You Should, Too

  Lawrence Hamtil: The Case for Holding Oil & Gas Stocks

  Michael Batnick: The Quote of the Decade

  Roger Nusbaum: Harsh Truths

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• Morning News: August 12, 2019
  Eddy Elfenbein, August 12th, 2019 at 7:30 am

  Lack of G7, IMF Support Seen Dimming Impact of U.S. Move on China’s Yuan

  Saudi Aramco Reports $47 Billion in Earnings, a Drop From a Year Earlier

  Hong Kong Cancels All Remaining Monday Flights as Protests Swarm Airport

  Yen and Bond Bulls Charge On as Share Markets Falter

  Fed Remains a Target as Economy Falls Short of Trump’s Ambitious Goals

  A Giant Factory Rises to Make a Product Filling Up the World: Plastic

  How Facebook is Changing to Deal With Scrutiny of Its Power

  A Lesson for Equinox and SoulCycle: Even Sweat Can Be Political

  Huawei’s Founder Wants an ‘Invincible Iron Army’ to Fight U.S.

  World’s Wealthiest Family Gets $4 Million Richer Every Hour

  Sensor Specialist AMS Triggers Bidding War for Osram

  Jeff Miller: Get Out, Hide Out, or Ride It Out?

  Howard Lindzon: Follow The Money – Seed Financing Trends

  Joshua Brown: When Everything That Counts Can’t Be Counted

  Ben Carlson: This is What Happens as Societies Become Wealthier & TL;DR: The Best Finance Books in One Sentence

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• Torchmark Is Now Globe Life
  Eddy Elfenbein, August 9th, 2019 at 12:55 pm

  Just a reminder that Torchmark is now called Globe Life. The new ticker symbol is GL. The Buy List page has been updated. It’s still a buy up to $94 per share.

• CWS Market Review – August 9, 2019
  Eddy Elfenbein, August 9th, 2019 at 7:08 am

  “When trade stops, war comes.” – Jack Ma

  The trade war heated up again this week, and that shook the stock and bond markets. Gold is at a six-year high, while the yield on the 10-year Treasury fell to a three-year low.

  The stock market recently dropped for six days in a row. The S&P 500 touched its lowest point in two months. There’s now talk that interest rates in the U.S. could go negative very soon. That’s already happened in much of Europe. I’ll tell you what it all means.

  

  Also this week, we got our final two Buy List earnings reports for this earnings season. Becton, Dickinson had good news, while Disney did not. I’ll have all the details in a bit. But first, let’s look at the latest ructions in the trade war.

  Interest Rates Are Plunging Around the World

  Last week, the Federal Reserve cut interest rates by 0.25%. That was the spark in a series of mini-explosions that shook the market for a few days. President Trump tweeted that he was going to add more tariffs on $300 billion worth of goods from China. That move probably increased the odds that the Fed will cut rates again next month. In fact, some people suggested that the Fed could cut them by 0.5%. There’s also the chance that the Fed could do a surprise cut before the next meeting.

  The People’s Bank of China, which is China’s Federal Reserve, struck back and allowed the yuan to sink below seven to the dollar (meaning a number that’s higher than seven to the dollar). This hasn’t happened in 11 years. Until now, the PBOC has defended the yuan at seven to the dollar. The yuan trades at the official rate inside China and at the unofficial rate outside China. (When in doubt, believe the price not controlled by the government.) Both markets had the yuan sinking below seven.

  China also said it will no longer buy U.S. agricultural products. China used to be a major buyer of U.S. soybeans. China has a massive population to feed. The soybeans aren’t for people but for pigs. Half of the world’s pigs are in China. I don’t see the point of this move. American farmers will find new buyers. The only ones hurt will be poor people in China who will have to pay higher prices. China will turn to countries like Brazil and Russia to fill the void.

  The problem with a trade war is that each action spurs a reaction, and that causes a counter-reaction. Small disputes can quickly escalate into something much bigger.

  That’s why China’s currency decision caused a global freakout. It showed that China is fighting back against President Trump’s tariffs. After that, I tweeted to watch out for the next move, which would be the U.S. Treasury Department’s labeling China as a “currency manipulator.” A few hours later, that’s exactly what happened.

  The stock market dropped nearly 3% on Monday. That’s really not that much for a one-day loss, but it was the biggest drop in several months, so it probably will have a larger psychological effect. Conversely, the bond market soared. The yield on the 10-year Treasury fell below 1.6% this week. That’s less than half the yield from November. The 10-year yield is now 30 basis points below that of the three-month yield.

  

  This has brought up talk of a worldwide deflationary trend. All over the place, commodity prices are falling, with the exception of gold and silver, which are soaring (as is Bitcoin). Prices for copper, iron, oil and other commodities are down. The impact is being felt everywhere. In Japan and in several countries in Europe, one-year government bonds carry negative yields. Right now, about $15 trillion worth of bonds carry negative yields. That’s about one-fourth of the world’s total. In Germany, the entire yield curve is negative.

  All of the recent events are reinforcing the current trend. The dollar is strong and may get much stronger. Last quarter, China had its slowest quarter of economic growth rate in 27 years. Lower commodity prices have an unexpected impact. For example, transportation companies can be negatively impacted. Also, trade routes are reestablished. Vietnam has done well thanks to President Trump’s trade policies. We’re witnessing a historic shift in interest rates.

  If this trade bickering continues, there’s a real risk of a global recession. I don’t think the U.S. is in serious danger, but Europe may be. I don’t want to frighten investors. Our portfolio is in a good spot.

  In fact, with the market being so nervous, our Buy List has performed very well lately. Of course, I mean that in relative terms. We outperform when everyone else gets scared. Our Buy List has outperformed the S&P 500 for the last 11 days in a row. For the year, we’re beating the market by 22.33% to 17.20%.

  Now let’s look at earnings from Becton, Dickinson and Disney.

  Earnings from Becton, Dickinson and Disney

  On Tuesday, the last of our Buy List stocks reported results for the Q2 earnings season.

  Before the opening, Becton, Dickinson (BDX) said they made $3.08 per share for the third quarter. That was three cents more than Wall Street had been expecting. This was a pretty solid report from Becton. Revenues rose 1.7% to $4.35 billion.

  In May, the company lowered its full-year forecast, so there was some nervousness that it might happen again. Fortunately, Becton stood by its current range of $11.65 to $11.75 per share. The company expects constant-currency revenues to grow by 5% to 6%.

  “Third quarter performance was strong. Our revenues highlight the breadth and diversity of the growth drivers in our portfolio, and we are seeing strength across all three segments,” said Vincent A. Forlenza, chairman and CEO. “As anticipated, our performance has accelerated, and we expect this momentum to continue. We remain confident in our outlook for fiscal year 2019 and our ability to deliver value to customers and shareholders.”

  Becton has three major business segments. For Q2, BD Medical had constant-currency revenue growth of 6%. BD Life Sciences was up 5.4%. BD Interventional was up 5.2%. To give you an idea of the currency impact, BDX saw revenue outside the U.S. fall by 1.6% for the quarter. Adjusted for currency, it was an increase of 6.5%.

  

  I suspect someone was expecting bad news because shares of BDX dropped off on Friday and again on Monday before the earnings announcement. The good results clearly mollified investors. BDX rallied on Tuesday, Wednesday and Thursday for a combined gain of 6.4%. This week, I’m raising my Buy Below on Becton, Dickinson to $260 per share.

  After the closing bell, Disney (DIS) reported a big earnings miss. For Q2, the Mouse House earned $1.35 per share. That was 40 cents below estimates. I’ll confess, this was a big shock to me. I was expecting an earnings beat.

  The story behind Disney’s Q2 is pretty complicated and not nearly as bad as the surface numbers suggest. Some of the problems are legacy issues that won’t be a factor in the near future. For example, Disney had incurred costs to complete the merger with Fox’s entertainment business. The Fox deal will still be an issue in Q3 and Q4.

  Disney’s CEO Bob Iger said he thought the results from Fox, particularly the studio, were “disappointing.” The movie “Dark Phoenix” was a bomb at the box office. Iger said that he’s not worried about the merger. They knew it was a big deal, and it will have setbacks.

  Disney has lots of big plans for the future. The company is ramping up investments in its streaming services. These could be big winners soon. In November, Disney will launch its bundled streaming package for $12.99.

  Income at Disney’s U.S. parks fell due to investments for their new Star Wars expansion. Despite the earnings miss, there’s nothing to suggest that Disney’s current business strategy isn’t working. The latest Avengers movie is the highest-grossing film in movie history.

  Shares of Disney fell nearly 5% on Wednesday but gained close to half of that back on Thursday. To be cautious, I’m lowering my Buy Below on Disney to $148 per share.

  On our Buy List, we have three stocks with quarters than ended in July: Ross Stores (ROST), Hormel Foods (HRL) and JM Smucker (SJM). Ross and Hormel will report earnings on August 22. Smucker will report on August 27.

  That’s all for now. Next week should be fairly quiet for economic news. I’ll be on the lookout for Tuesday’s CPI report. The market fears deflation, but I’m curious what the facts have to say. On Thursday, we’ll get reports on retail sales and industrial production. The last report on retail sales was pretty good. Let’s see if this trend continues. 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 9, 2019
  Eddy Elfenbein, August 9th, 2019 at 7:02 am

  U.K. Economy Shrinks for First Time Since Wake of Crisis, Raising Brexit Stakes

  Japan Posts Surprising Growth, but Economic Threats Loom

  U.S. Holds Off on Huawei Licenses as China Halts Crop-Buying

  Huawei Unveils Harmony, Its Answer to Android, in Survival Bid

  Help for the Economy? Despite Grumbling, Trump Has Had Plenty

  Malaysia Files Criminal Charges Against 17 Goldman Sachs Executives

  Uber Loses $5 Billion, Misses Wall Street Targets Despite Easing Price War

  Bayer Soars on Report of Proposed $8 Billion Roundup Settlement

  Broadcom to Buy Symantec’s Enterprise Unit for $10.7 Billion in Software Push

  America’s Obsession With Beef Is Killing Leather

  Zillow’s Makeover Is Testing Investors’ Patience

  Trade War Escalation Nudges U.S. Closer to Recession

  Jeff Carter: Macroeconomic Landscape Shifting

  Roger Nusbaum: Alternatives & There’s A Lot That’s Different But The Important Stuff Is The Same

  Cullen Roche: Three Things I Think I Think – Recession Alert Edition

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• Morning News: August 8, 2019
  Eddy Elfenbein, August 8th, 2019 at 7:06 am

  China Sets Yuan Fixing Stronger Than Expected, Soothing Nerves

  Powell Speaks, Trump Tweets, China Reacts, Markets Freak. Repeat

  Recession Warning in Bond Market Sharpens, Adding Pressure on Fed

  U.S. Government Contractors Get First Look at Huawei Ban

  Facebook Wants to Integrate Instagram Direct Messages With Messenger

  FedEx’s Amazon Freeze-Out Sets Up Delivery Wars

  New York Times Shares Slide on Digital Ad Revenue Warning

  The Secret History of ‘Easter Eggs’

  Venture Capital Fuels Latam ‘Unicorns’ Expansion Beyond Borders

  An Electric Harley Loses the Growl But Still Aims to Turn Heads

  Money Managers With $74 Trillion Are Perched on Brink of Crisis

  Joshua Brown: Negative Rates Could Happen in America, Too

  Michael Batnick: Is This The Bottom?

  Ben Carlson: Animal Spirits: The Bankrupt Barber & Cheap Money vs. Investor Psychology

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

  World Economy Edges Closer to a Recession as Trade Fears Spread

  Circulating in China’s Financial System: More Than $200 Billion in I.O.U.s

  Trump Dismisses Fears of Long-Lasting Trade War; China Sees Severe Global Impact

  A Weak Dollar Could Help the U.S. Getting One Isn’t So Easy.

  Tariff Fears Caused a U.S. Import Surge. Now Warehouses Are Full

  Disney Shareholders, Your Thrill Ride Has Officially Begun

  Alphabet’s DeepMind Takes on Billion-Dollar Debt and Loses $572 Million

  SoftBank Says Vision Fund 2 Could Start Investing Soon, Bags Big Gains on First

  Uber Wants to Sell You Train Tickets. And Be Your Bus Service, Too.

  Lanxess, Bayer Sell Chemical Park Operator to Macquarie for $3.9 Billion

  Legal Shield for Websites Rattles Under Onslaught of Hate Speech

  Man Accused Of Bribing AT&T Employees In Conspiracy To Unlock Millions Of Phones

  Nick Maggiulli: When Money Dies

  Howard Lindzon: How To Jump On A Rocketship…

  Jeff Miller: Fear Induced Trading Mistakes

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