Archive for September, 2019

• ICE Now Trades Bitcoin
  Eddy Elfenbein, September 23rd, 2019 at 9:38 am

  Today is a big day for Bitcoin. It’s now traded at ICE.

  Monday marks the debut of futures contracts offered by Intercontinental Exchange Inc. that can result in delivery of the digital currency, a new chapter in Bitcoin’s tumultuous 10-year history. The first federally regulated market to buy and sell Bitcoin could entice conservative investors who have so far stayed on the sidelines to begin adding the digital asset to their portfolios, according to industry analysts. It also furthers efforts to create a market structure for financial professionals to take the digital asset seriously.

  “The move to centralize and create a scalable infrastructure for crypto asset investment” is “a positive step,” said James Putra, head of product strategy at TradeStation Crypto. Because the ICE contracts will deliver actual Bitcoin, an investor can potentially profit first from the rise in the futures price and then take possession of the coins, he said. “I can capture both pieces and continue to ride that upward.”

• Morning News: September 23, 2019
  Eddy Elfenbein, September 23rd, 2019 at 7:39 am

  A Long-Despised and Risky Economic Doctrine Is Now a Hot Idea

  Trump’s Fed Tweets Shown to Have ‘Significant’ Effect on Trading

  Forget Stocks – Money Market Is Signaling Possible Troubles Ahead

  Like Fine Whiskey, Texan Oil Exporters Tout Unblended Crude

  China to Send State Officials to 100 Private Firms Including Alibaba

  From Underwear to Cars, India’s Economy Is Fraying

  GM Strike Heads Into a Second Week

  Pressure Mounts on WeWork CEO Adam Neumann as Board Weighs Coup

  British Travel Firm Thomas Cook Collapses, Leaving Hundreds of Thousands Stranded

  The Slow-Burning Success of Disney’s Bob Iger

  Ceconomy Eyes Deal with Heirs of Media Markt Founder

  Walmart Ban Shows Vaping’s Fall From Smoking Fix to Health Scare

  Ben Carlson: Can We Talk Ourselves Into a Recession? & Crazy But True

  Jeff Miller: Weighing the Week Ahead: A Bigger Wall Now Under Construction

  Howard Lindzon: The Broken IPO Process and More WeWork…

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• Point Spreads and Stock Prices
  Eddy Elfenbein, September 20th, 2019 at 1:23 pm

  Point spreads of 20 or more points happen about once in every 1,000 NFL games. There are two this weekend. There’s a financial markets lesson here.

  Betting markets, like financial markets, tend to be efficient, meaning it’s hard to beat them consistently. And like financial markets, they do have blind spots.

  Both financial markets and betting have problems pricing extreme events. They tend to substitute conservatism for a lack of data. As a result, extreme favorites have, in aggregate, a hard time covering the spread.

  For games with spreads of 19 or more points, favorites have failed to cover in 12 of those 14 games. What appears to be a safe bet probably isn’t. This is somewhat like ditching your stocks at the low.

  Just a good time to remember that point spreads and stock prices aren’t set by equations but by the madness of crowds.

• CWS Market Review – September 20, 2019
  Eddy Elfenbein, September 20th, 2019 at 7:08 am

  “Things are never clear until it’s too late.” – Peter Lynch

  On Wednesday, the Federal Reserve voted to cut interest rates. The new target range for the Federal funds rate is 1.75% to 2.00%. This is the Fed’s second rate cut in the last seven weeks. As recently as December, the Fed had been raising interest rates.

  President Trump wasn’t pleased with the move, as he wanted a larger cut. The president tweeted, “Jay Powell and the Federal Reserve Fail Again. No ‘guts,’ no sense, no vision! A terrible communicator!”

  

  Despite the president’s criticism, the stock market has calmed down considerably. In six of the last ten trading sessions, the S&P 500 has closed up or down by less than 0.1%. The index is close to another new all-time high.

  In this week’s issue, we’ll take a closer look at the Fed’s move and what it means for us. Our Buy List continues to thrive, and we touched another new high this week. Later on, I’ll preview next week’s earnings report from FactSet. We also had one of our stocks spin out an IPO. But first, let’s look at the Fed’s rate cut.

  The Fed Cuts – What’s Next?

  This week’s rate cut was widely expected. On Wall Street, whenever an expected thing happens, observers are quick to dismiss it as old news. However, we should bear in mind that the Fed was raising rates not that long ago. The last increase came in December. In fact, according to the Fed’s own projections, the central bank planned to continue hiking rates all year.

  The story of this year is how that view of the economy fell apart. Thanks to weakness in China, there were fears of an economic slowdown in the United States. Those fears were compounded by a growing trade war between the U.S. and China.

  The most visible aspect of the new world view was felt in the bond market. About this time one year ago, the yield on the 10-year Treasury got to 3.2%. Soon after, yields crashed. A few weeks ago, it dropped under 1.5%.

  That caused the Federal Reserve to take notice. I’ll give you an example. As a very general rule of thumb, the yield on the two-year Treasury leads where the Fed puts interest rates. Not always, but the measure has a decent track record. In November, the two-year yield was more than 70 basis points above the Fed. Then came the recession fears, and by June, the two-year was 60 basis points below the Fed. That put a lot of pressure on the Fed to act.

  At his post-meeting press conference, Fed Chairman Jay Powell said:

  Since the middle of last year, the global growth outlook has weakened, notably in Europe and China. Additionally, a number of geopolitical risks, including Brexit, remain unresolved. Trade-policy tensions have waxed and waned, and elevated uncertainty is weighing on U.S. investment and exports. Our business contacts around the country have been telling us that uncertainty about trade policy has discouraged them from investing in their businesses.

  Powell also reiterated that he sees this week’s action as a mid-cycle adjustment rather than the start of a long series of rate cuts prior to a recession. This is key. Historically, it’s very unusual for the Fed to be cutting rates when unemployment is below 4%. The current Fed funds target rate is basically in line with inflation, meaning the real rate is near 0%.

  

  What does this mean for us? For the most part, lower rates are very good for the stock market. Lower rates tend to boost the market’s valuation. Of course, it also helps with borrowing costs. I think we’ll see continued improvement in the housing market.

  The S&P 500 is back over 3,000. Last Thursday, the index came very close to another new high. I wouldn’t be surprised to see us hit a peak any day now. Our Buy List just recently hit a new high. We’re now up 23.8% on the year.

  Will the Fed continue to cut? Eh, I’m not so sure. I think there’s a good chance the Fed will take a pause. Maybe one more cut before the end of the year. The fact is that the economy is still doing well. I’m not saying the economy is ripping higher, but the recession fears were clearly overblown.

  For example, this week we learned that housing starts are at a 12-year high. Monday’s industrial production was also quite good. The IP reports have been pretty weak this year. Over the weekend, the price of oil spiked after an attack on Saudi oil-production facilities. It’s still early, but the impact appears to be muted. There’s a lot of incentive to get production back to normal.

  I thought it was interesting that there were three dissensions in this week’s Fed statement. Dissenting votes are rare but not unheard of. Two Fed members voted for no change to interest rates, while a third wanted to see a 50-basis-point cut.

  In this meeting, the Fed also updated its economic projections. If the median vote gets its way, that means the Fed won’t be touching rates for the rest of this year and all of 2020. I can’t say how long that view will last, but that’s why I took notice of the dissenting votes. At some point, the dissenters could become a majority.

  Last week, we saw a major rotation from growth to value. This got a lot of attention, but I think the story was a little different than what was commonly discussed. I believe it was more of a shift from defensive stocks to cyclical stocks. Of course, there’s a lot of overlap between those categories, but the defensive-to-cyclical was, in my view, the dominant theme.

  In essence, this was the stock market violently pushing back against the view that the economy is getting weak. It’s not. If the market is right, then the Fed may back off on rates. We’ll learn a lot more in a few weeks when the third-quarter earnings season gets going.

  According to the latest figures, Wall Street expects the S&P 500 to report earnings of $40.98 per share for Q3 (that’s the index-adjusted number). That figure has come down about 7.5% since the start of the year. It’s typical for earnings estimates to be pared back as earnings season approaches.

  But if Wall Street’s estimate is correct, then it would be about 1% below the earnings results for last year’s Q3 and the first quarter of negative earnings growth in three years. Bear in mind that after being pared down, earnings usually beat expectations by about 3% to 5%. It’s a $30 trillion game of “lower the bar to the point where you can easily step over it and declare yourself the winner.”

  All told, earnings growth for the year is expected to be up by 6.6%. We’re still a long way from a bubble. The S&P 500 is currently going for 16.6 times the earnings estimate for 2020. Speaking of earnings, let’s take a look at our Buy List earnings report for next week.

  Preview of FactSet’s Earnings

  FactSet (FDS) is scheduled to report its fiscal Q4 earnings before the market opens on September 26. Their fiscal year ends on August 31. FDS has been a big winner for us this year. In May, FactSet raised its dividend by 12.5%. The quarterly payout increased from 64 to 72 cents per share.

  For Q3, FactSet had a blow-out earnings report. The company earned $2.62 per share, which topped estimates by 26 cents per share. The result was a 20% increase over the same quarter from last year. Organic revenue grew 7.3% to $366.3 million. FactSet’s operating margin increased to 34%.

  The key stat for FDS is Annual Subscription Value, or ASV. Last quarter, that rose to $1.45 billion. The organic growth rate, which excludes the effects of acquisitions, dispositions, and foreign currency, was 5.6%. The Board of Directors approved a $210 million increase to the existing share-repurchase program.

  

  In June, FactSet updated its guidance for 2019. The company expects revenue between $1.42 and $1.44 billion, and operating margin between 32.5% and 33.0%. FactSet sees its earnings per share ranging between $9.80 and $9.90. That’s an increase to the previous guidance of $9.50 to $9.65 per share.

  Since FactSet has earned $7.39 per share for the first three quarters, that implies an earnings range for Q4 of $2.41 to $2.51 per share. The consensus on Wall Street is for earnings of $2.47 per share. In June, shares of FDS briefly broke above $300, but the stock has since pulled back. Another strong earnings report could push FDS back above $300.

  We’re in the slow period for Buy List earnings reports. The next Buy List earnings report will be RPM International (RPM) on October 2. After that, we’ll have to wait until the Q3 earnings season starts in mid-October.

  Buy List Updates

  On Wednesday, Danaher (DHR) had an initial public offering for Envista (NVST), Danaher’s dental business. This is not a spin-off; it’s an IPO. Danaher still holds a large stake in the company.

  Envista priced at $22 per share. Danaher sold 26.8 million shares at that price. The shares opened at $25.65 per share and got as high as $28.92. Danaher still owns around 83% of the voting power in Envista. Danaher remains a buy up to $150 per share.

  I also want to raise the Buy Below prices for two of our Buy List stocks. Globe Life (GL), the new name for Torchmark, has been quietly gaining steam lately. The shares are up about 10% in the last month.

  In July, GL beat earnings by two cents. The company projects net operating income per share will be between $6.67 and $6.77. I’m raising our Buy Below to $100 per share.

  Raytheon (RTN) had an interesting week. One day it was upgraded by an analyst at JP Morgan, and the next day it was downgraded by an analyst at Sanford Bernstein. Shareholders of RTN will, at some point, get 2.3348 shares of the new combined company with United Technologies (UTX). The combined company, however, will not include the spinoffs of Otis and Carrier.

  Shares of RTN have been rallying lately, possibly due to increased international tensions. This week, I’m raising our Buy Below on Raytheon to $210 per share.

  That’s all for now. There’s not much in the way of economic news next week. On Tuesday, the consumer confidence report comes out. Then on Thursday, we’ll get another revision to the Q2 GDP report. The initial report showed real annualized growth of 2.1% in the second quarter. Last month, that was revised down to 2.0%. On Friday, we’ll get data on personal income and spending in addition to the durable-goods report. 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: September 20, 2019
  Eddy Elfenbein, September 20th, 2019 at 7:03 am

  The New Capitalism Is Looking a Lot Like the Old Capitalism

  Prolonged Funding Stress Boosts Calls for Permanent Fed Fix

  Fed’s Bullard, Explaining Dissent, Says U.S. Manufacturing Appears ‘In Recession’

  Exxon Shuts Major Texas Refinery After Flooding

  The World’s Biggest Offshore Wind Farm Will Be as Cheap as Coal

  Bezos and Zuckerberg Take Their Pitches to Washington

  Silicon Valley Goes to Therapy

  Banish Roundup From the Farm? It’ll Take More Than Lawsuits

  Google to Invest 3 Billion Euros in European Data Centers

  Uber and Lyft Drivers Gain Labor Clout, With Help From an App

  China Detains Former U.S. Air Force Pilot Flying for FedEx

  Britain’s Thomas Cook Scrambles for $250 Million to Avert Collapse

  Ben Carlson: Explaining the Stock Market to Big Cat

  Cullen Roche: Three Things I Think I Think – Repo Madness!

  Michael Batnick: Searching for Bobby Shiller

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• Morning News: September 19, 2019
  Eddy Elfenbein, September 19th, 2019 at 7:47 am

  How Brexit Could Break Britain’s Food Chain

  Global Economy Seen Sliding Toward Weakest Growth in Decade

  U.S., Chinese Trade Deputies Face Off in Washington Amid Deep Differences

  A Rerun from the 1970s? This Economic Episode Has Different Risks

  Jittery Repo Market Has Calmed, But Fed Plans to Intervene Again

  Apple’s Brand in China Takes a Hit From Backlash Against Trump

  GM’s Mary Barra Bets Big on an Electric, Self-Driving Future

  Tesla’s Model 3 Earns Insurance Industry’s Top Safety Rating

  UPS CEO Says Growth Is Steady in Amazon Age, Even as FedEx Reels

  AT&T Explores Parting Ways With DirecTV

  Are Roku Investors Overreacting to Comcast’s Free Streaming TV Box?

  Fukushima Nuclear Disaster Trial Ends With Acquittals of 3 Executives

  Cullen Roche: What is the Value of Financial Advice?

  Joshua Brown: Do “Insurance Cuts” Actually Work?

  Michael Batnick: Distribution & Animal Spirits: Michael’s Brain Fart

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• Envista Goes Public
  Eddy Elfenbein, September 18th, 2019 at 3:00 pm

  Today, Danaher‘s (DHR) dental business IPO’d. The new company, called Envista, trades under the symbol NVST.

  Envista priced at $22 per share. The shares opened today at $25.65 per share and have been as high as $28.50.

  Danaher owns around 80% of the company.

• Today’s Fed Policy Statement
  Eddy Elfenbein, September 18th, 2019 at 2:02 pm

  The Federal Reserve cut by 0.25%.

  There were three dissents. Two wanted no cut while one member wanted a 0.5% cut.

  Information received since the Federal Open Market Committee met in July indicates that the labor market remains strong and that economic activity has been rising at a moderate rate. Job gains have been solid, on average, in recent months, and the unemployment rate has remained low. Although household spending has been rising at a strong pace, business fixed investment and exports have weakened. On a 12-month basis, overall inflation and inflation for items other than food and energy are running below 2 percent. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed.

  Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. In light of the implications of global developments for the economic outlook as well as muted inflation pressures, the Committee decided to lower the target range for the federal funds rate to 1-3/4 to 2 percent. This action supports the Committee’s view that sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective are the most likely outcomes, but uncertainties about this outlook remain. As the Committee contemplates the future path of the target range for the federal funds rate, it will continue to monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion, with a strong labor market and inflation near its symmetric 2 percent objective.

  In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its maximum employment objective and its symmetric 2 percent inflation objective. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.

  Voting for the monetary policy action were Jerome H. Powell, Chair, John C. Williams, Vice Chair; Michelle W. Bowman; Lael Brainard; Richard H. Clarida; Charles L. Evans; and Randal K. Quarles. Voting against the action were James Bullard, who preferred at this meeting to lower the target range for the federal funds rate to 1-1/2 to 1-3/4 percent; and Esther L. George and Eric S. Rosengren, who preferred to maintain the target range at 2 percent to 2-1/4 percent.

  Here are the Fed projections.

• Waiting on the Fed
  Eddy Elfenbein, September 18th, 2019 at 10:15 am

  The Federal Reserve is meeting today. It looks very likely that the Fed will cut interest rates again.

  This morning, we got news that housing starts rose to a 12-year high:

  U.S. homebuilding surged to more than a 12-year high in August as both single- and multi-family housing construction increased, suggesting that lower mortgage rates were finally providing a boost to the struggling housing market.

  Housing starts jumped 12.3% to a seasonally adjusted annual rate of 1.364 million units last month, the highest level since June 2007, the Commerce Department said on Wednesday. Data for July was revised to show homebuilding falling to a pace of 1.215 million units, instead of decreasing at a rate of 1.191 million units as previously reported.

• Morning News: September 18, 2019
  Eddy Elfenbein, September 18th, 2019 at 6:53 am

  EU’s Juncker Says the Risk of a No-Deal Brexit Is Now ‘Palpable’

  Fed Preps Second $75 Billion Blast With Repo Market Still On Edge

  Lawmakers Urge Aggressive Action from Regulators on Big Tech

  G.M. Chief’s Test: Satisfy Striking Workers and Sustain Bottom Line

  The Autoworkers Strike is Bigger Than G.M.

  Window Closing Fast for WeWork Parent to Launch IPO This Year

  Chinese Retailers Abruptly Stop Selling Juul e-Cigarettes

  India Bans E-Cigarettes Amid Global Concern Over Health Risks

  Where’s the Beef? Argentine Ranchers Hope More is Headed to China

  Chipotle Stock Is Gaining Because It’s Not Turning Into Taco Bell

  KFC Testing Fried Chicken Sandwich Between Two Glazed Donuts

  IPhone 11 and 11 Pro Review: Thinking Differently in the Golden Age of Smartphones

  Nick Maggiulli: The Cost of Waiting

  Jeff Carter: Partner, Build or Ignore

  Ben Carlson: Yes, the Stock Market is Going to Crash

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