Archive for October, 2019

• Crossing Wall Street – October 11, 2019
  Eddy Elfenbein, October 11th, 2019 at 7:08 am

  “The expectation of an event creates a much deeper impression on the exchange than the event itself.” – Jose de la Vega, 1688

  Third-quarter earnings season is finally here! This is like Judgement Day for Wall Street. If you do well, your shares can be richly rewarded. However, if you disappoint the market gods, they show little mercy.

  

  This could the first quarterly earnings decline for the S&P 500 in three years. If I had to guess, I’d say that we’ll narrowly avert a decline, but it will be close. Still, earnings expectations have come down a lot. Since January 1, the estimates for Q3 earnings have been pared back by 8%. The typical Wall Street game is to lower expectations just low enough that companies can beat them by a few percentage points. Then, of course, they declare victory.

  In this week’s issue, we’ll look at some of our Buy List stocks that are due to report earnings next week. But first, last week we learned that the unemployment rate fell to a 50-year low, yet the Federal Reserve has been cutting rates, and will likely do so again soon. What gives? I’ll share my thoughts.

  It’s a Weird, Weird World

  The current state of the economic world is weird. At least, it is to me. All the standards that I learned and had become used to, it seems, have been thrown out the window.

  I never thought that bonds with negative yields were possible, yet here we are. There’s several trillion dollars’ worth of them to tell me I’m wrong, so I’ll believe them.

  I didn’t think the Federal Reserve could lower interest rates to 0%. Or keep them there for years. Or see other central banks go even lower. Yet it happened.

  I didn’t think the U.S. economy could expand at a tepid yet steady pace for ten years. Again, it happened.

  Nor did I think the economy could create so many jobs so consistently, yet not see much in the way of wage increases. But we saw it.

  It seems to me that the natural interest rate has dropped to near 0%. That’s so bizarre to me, but I suspect it’s true.

  All of these trends baffle me, and I can’t explain what’s happening. Sure, I have some ideas. But the point is that the current economic models for the world aren’t very useful right now. The financial crisis broke economics, and no one’s put it back together yet. At some point, I imagine we’ll see some brilliant young professor who will tie all the pieces together. But until then, I’m pretty stumped.

  You’ll notice that the conflict I’m describing isn’t so much between me and someone else. It’s really between me and me—what I see going on and what I’ve been taught. I’m not alone.

  Here’s the important point for us. You don’t need to have the world figured out to be a good investor. All you really need is discipline and time. I’d also add a suppleness of mind that allows you take in discordant evidence. Most people, when presented with evidence that conflicts with their belief, simply dismiss the evidence. Dogmas offer comfort.

  Now let me apologize for that brief bit of navel-gazing, and we’ll turn to last week’s labor report. On Friday, the government said that the economy created 136,000 net new jobs last month. The previous month’s figures were revised a bit higher.

  The unemployment rate ticked down to 3.5%. That’s the lowest in 50 years. It’s also the lowest peacetime rate in more than 70 years. (Some folks on Twitter took me to task for calling this peacetime. Sorry, but I stand by my claim. In terms of mobilization, the current deployments are nowhere close to the numbers we saw in Korea and Vietnam. Not to mention that there was a draft.)

  

  Despite the unemployment rate’s being so low, there’s still not much in the way of inflation. This week’s inflation report showed no change for September. The core rate rose by 0.1%. That’s good to hear since the three months prior to that all saw increases of 0.3%. If there was any threat of higher prices, that fear seems to have passed.

  This means the Federal Reserve will almost certainly cut interest rates again when they meet on October 30. Another cut will bring the Fed’s target for the Fed funds rate to 1.5% to 1.75%. There’s a chance that the yield curve could revert soon. The spread between the three-month and 10-year yields is down to one basis point. A few weeks ago, the spread was over 50 basis points.

  What about after that? I think the Fed might take it easy after that. Lower rates will help the mortgage market, and that will filter down to the housing sector. Have you noticed that Continental Building Products (CBPX), our wayward wallboard stock, is up more than 25% since early August? Sherwin-Williams (SHW), the paint people, just touched a new 52-week high. About this time last year, SHW was getting crushed by the market. As Jesse Livermore said, “It never was my thinking that made the big money for me. It always was my sitting.”

  

  Now let’s turn to earnings season.

  Earnings Preview for Eagle Bank and Signature Bank

  Earnings season kicks off for us next week when Eagle Bank and Signature Bank are due to report. Actually, I’m guessing that Signature will report on October 17. They haven’t said so yet, but I’m guessing that based on previous years. Eagle has said they’ll report on October 16.

  Let’s start with Eagle Bancorp (EGBN) because their last earnings report caused so much trouble. In July, Eagle said they made $1.08 per share for their Q2. That was pretty good. It was four cents more than expectations.

  The problem is that Eagle also said their legal bill has soared due to “investigations and related document requests and subpoenas from government agencies.”

  A few key points. The bank made it clear that this will not “materially impact its results.” Also, the bank isn’t under any regulatory restrictions. The problem is that Eagle isn’t allowed to talk about what’s happening. I suspect this is connected to local Washington, D.C. political scandals. On July 18, the shares dropped almost 27%.

  For Q3, Wall Street expects earnings of $1.07 per share. Eagle is trading for less than 10 times this year’s earnings estimate.

  Three months ago, Signature Bank (SBNY) reported earnings of $2.72 per share. That beat expectations by one penny.

  Net interest margin came in at 2.75%. That’s down 20 basis points from a year ago. That’s not great, but it’s certainly respectable for this environment.

  I’m happy to say that Signature is almost done with its taxi-medallion mess. The bank went into this in a big way, but then thanks to ride-sharing apps, the medallions plunged in price. That left the bank holding a bunch of bum loans.

  In Q2, Signature sold off $46.4 million in medallion loans. That leaves them with $18.8 million in non-performing medallion loans plus $43.8 million in repo-ed medallions. It was a costly mistake, but the issue is basically behind them.

  For Q3, Wall Street expects Signature to earn $2.70 per share.

  Hormel Foods Updates Guidance

  This week, Hormel Foods (HRL) hosted an investor day. The Spam folks narrowed their full-year guidance by a tiny bit. Hormel now sees full-year earnings ranging between $1.76 and $1.80 per share. The previous guidance was $1.71 to $1.85 per share.

  The shares pulled back some on the news. Q4 results will come out on November 26. Hormel remains a buy up to $46 per share.

  That’s all for now. Earnings reports will probably dominate the headlines next week. The bond market will be closed on Monday for Columbus Day, but the stock market will be open. On Wednesday, the retail-sales report comes out. This should give us a good look at consumer spending which had been doing well. Then on Thursday, we’ll get the report on industrial production. There will also be reports on housing starts and building permits. 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: October 11, 2019
  Eddy Elfenbein, October 11th, 2019 at 7:05 am

  Brexit Hopes Rise as U.K. and EU Take a Step Closer to a Deal

  China’s Resistance to a U.S. Investor Safeguard Riles Team Trump

  Mutual Funds’ Embrace of High-Profile Unicorns Backfires

  Dividend Growth May Steady Stock Portfolios in Shaky Markets

  Fund Managers Try Financial Planning as Indexing Cuts Profit

  U.S. Consumer Prices Trail Forecasts as Used-Car Costs Drop

  Netflix Goes All Out to Wow Children as Streaming Wars Intensify

  How Photos of Your Kids Are Powering Surveillance Technology

  Renault Fires Its C.E.O., as the Post-Ghosn Shake-Up Continues

  SAP Reverts to Co-CEOs After Showman McDermott’s Decade of Growth

  Fidelity Drops Commissions to Zero

  Boeing and Porsche Team Up to Explore Urban Flying Vehicles

  Ben Carlson: World War II: The Economic Anomaly & Animal Spirits: Winners of the Financial Crisis

  Michael Batnick: Is The Fed Managing Stock Market Sentiment? & Tell Me What You See

  Jeff Carter: A Backdoor Way To Find Information

  Be sure to follow me on Twitter.

• Morning News: October 10, 2019
  Eddy Elfenbein, October 10th, 2019 at 7:15 am

  Without Naming Huawei, E.U. Warns Against 5G Firms From ‘Hostile’ Powers

  Brexit Deal ‘Not Impossible’ as Leaders Prepare to Meet

  U.S. Weighs Currency Pact With China as Part of Partial Deal

  Top-Level U.S.-China Trade Talks Resume as Irritants Sour Atmosphere

  Apple Removes App That Tracked Hong Kong Police

  WeWork India Fighting for New Funds After Talks With Local Lender Collapse

  The Radical Manifesto Embraced by Google Workers and Uber Drivers

  PG&E’s Bankruptcy Judge Opens the Door to Rival Chapter 11 Exit Plan

  Unprecedented California Blackout Plunges Millions Into Darkness

  Target’s Chief Merchant Quits to Run Bed Bath & Beyond

  Houston Rockets Nike Merchandise Disappears from China Stores

  A Wild Plan to Get Gold Out of London Intrigues Maduro Officials

  Cullen Roche: Three Things I Think I Think – Banning Billionaires and Other Stupid Ideas

  Roger Nusbaum: What Is And Is Not A Risk

  Joshua Brown: “My advice never changes.” & I Did Everything I Was Supposed to Do

• Morning News: October 9, 2019
  Eddy Elfenbein, October 9th, 2019 at 7:31 am

  China Is a Minefield, and Foreign Firms Keep Hitting New Tripwires

  China Open to Partial U.S. Trade Deal Despite Tech Blacklist

  After Spurned Play for LSE, Hong Kong Bourse to Seek Deeper China Embrace

  U.S. Loses Top Spot to Singapore in Competitiveness Rankings

  Fed to Increase Supply of Bank Reserves

  To Live or Die by Google Search Brings an Escalating Cost

  A Hard Lesson in Silicon Valley: Profits Matter

  Behind Amazon’s Abrupt Change in Its Film Strategy

  Trump’s Fast-Tracking of Oil Pipelines Hits Legal Roadblocks

  Oracle Shelves Larry Ellison’s Dream of Cloud Dominance

  California Makes H.I.V.-Prevention Drugs Available Without a Prescription

  Jury Says J&J Must Pay $8 Billion in Case Over Male Breast Growth Linked to Risperdal

  Nick Maggiulli: What’s Your Delta?

  Ben Carlson: Would the Market Care if the President Was Impeached?

  Jeff Miller: These Styles Will Come Back

  Be sure to follow me on Twitter.

• Social Experiment
  Eddy Elfenbein, October 8th, 2019 at 6:04 pm

  Social Experiment.

  Please answer this poll but let's see if we can make results come out exactly 90% to 10%.

  Go!

  — Eddy Elfenbein (@EddyElfenbein) October 8, 2019

• Economic Ignorance
  Eddy Elfenbein, October 8th, 2019 at 12:43 pm

  Writing about finance, one thing I’ve noticed is that few things get people really angry quite like good economic news.

  When an economist says the economy is doing well, you can be sure to hear a person object. They’ll point out that someone they know isn’t prospering.

  The difference, of course, is that economists speak of dry aggregates while non-economists understand narratives.

  Consider some stats:

  We’re currently in the 125th month of an economic expansion, which is a record.

  We’re in the 128th month of a bull market, also a record.

  The unemployment rate is at a 50-year low.

  We currently have the lowest peacetime unemployment rate in 70 years.

  We just had the best nine-month start to a year since 1998.

  These facts are true yet they make some angry people even angrier.

  The Wall Street Journal notes today how little people know of the economy.

  Only about a fifth of the population knows the Fed aims for 2% inflation, a survey by academics Olivier Coibion, Yuriy Gorodnichenko and Michael Weber published by the National Bureau of Economic Research showed, with four in 10 saying the Fed targets 10% or more inflation.

  The irony of this is that economists are trying to study and model the behavior of people who don’t care at all about economics.

• Morning News: October 8, 2019
  Eddy Elfenbein, October 8th, 2019 at 7:20 am

  EU Finance Commissioner Pledges to Regulate Digital Currencies

  Hong Kong Stock Exchange Drops Nearly $37 Billion Bid for London Rival

  The End of Libor: The Biggest Banking Challenge You’ve Never Heard Of

  Johnson Tells Merkel Deal ‘Essentially Impossible’

  A U.S.-China Trade Deal Just Got Harder

  China Signals It Will Hit Back Over U.S. Tech Blacklist

  U.S. Using Trade Deals to Shield Tech Giants From Foreign Regulators

  Index Funds Invest Trillions But Rarely Challenge Management

  Battle for PG&E Hinges on Rival Plans and Uncertain Costs

  Costco Delivers Another Earnings Beat — Will the Momentum Last?

  SoftBank’s Damage From Uber, WeWork Could Exceed $5 Billion

  G.M. Strike’s Economic Toll: Idle Trucks, Packed Warehouses

  Joshua Brown: Recession is Coming, “Code Red” Yield Curve Indicator Seals the Deal

  Michael Batnick: Unified American Discourse

  Jeff Carter: Free? There Is No Free Lunch

  Be sure to follow me on Twitter.

• Earnings Are Expected to Decline for Q3
  Eddy Elfenbein, October 7th, 2019 at 11:15 am

  Q3 earnings season begins this week. Wall Street expects the S&P 500 to earn $40.73 per share. That’s down from $44.28 at the start of the year.

  If the current estimate is right, then it would be a decline of 1.6%. This could be the first quarterly earnings decline in three years. Reported results usually beat expectations by a few percentage points, so there’s a good chance we may miss a quarterly decline.

  For 2019, Wall Street expects the S&P 500 to earn $161.03 per share. That’s down more than $10 per share since the start of the year.

  For next year, Wall Street expects earnings of $179.83. Based on Friday’s close, the S&P 500 is currently going for 16.4 times the earnings estimate for 2020.

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

  Where the U.S.-Japan Trade Deal Falls Short of Trans-Pacific Pact Abandoned by Trump

  China Narrows Scope for Trade Deal With U.S. Ahead of Talks

  How the Impeachment Ruckus Changes the Tone of U.S.-China Trade Talks

  How a Tweet Put the N.B.A. in Hot Water in China

  How Boeing vs. Airbus Became Trump vs. Europe

  U.S. Economists Wrestle with How to Help ‘Left Behind’ Areas

  American Railroads Are Already in Recession With No End in Sight

  GE Freezes Pension Benefits to Cut Deficit By Up to $8 Billion

  Talks to End G.M. Strike Take ‘Turn for the Worse,’ U.A.W. Says

  Harley Struggles to Fire Up New Generation of Riders with Electric Bike Debut

  New Nissan Pay Problems Point to Conflicts at the Top

  Ben Carlson: Finance Topics That Make Your Head Hurt

  Lawrence Hamtil: Lawrence Hamtil & Tobias Carlisle Discuss Sectors, Countries, and Growth vs Value

  Howard Lindzon: Live From Tuscany – Tim Cook Has It Under Control!

  Jeff Miller: Investment Effects of the Changing Political Landscape

  Be sure to follow me on Twitter.

• The September Jobs Report
  Eddy Elfenbein, October 4th, 2019 at 8:37 am

  The September jobs report is out. Last month, the US economy created 136,000 net new jobs. The unemployment rate dropped to 3.5%. That’s the lowest in 50 years.

  The number for July was revised higher by 7,000 and August was revised up by 38,000 for a total revision of +45,000. The private sector gained 114,000.

  The labor force participation rate was 63.2%.

  Working out the decimals, the unemployment rate is 3.517%. The last time unemployment was lower was November 1969.

  The jobs to population ratio is up to 60.96%. That’s the highest since December 2008.

  In the last year, average hourly earnings are up by 2.9%.