Archive for October, 2019

• CWS Market Review – October 4, 2019
  Eddy Elfenbein, October 4th, 2019 at 7:08 am

  “Investing is where you find a few great companies and then sit on your ass.” – Charlie Munger

  So true, Charlie. Too many investors overthink this game.

  The S&P 500 wrapped up the third quarter with a small gain. This was the index’s 14th quarterly gain in the last 16 quarters.

  Wall Street finally a got a little action this week. The S&P 500 fell by more than 1% on back-to-back days. That was the first time that happened all year. In fact, it looked like Thursday was going to be the third in a row, but a rally saved us. The index is now firmly nestled between its 50- and 200-day moving averages. Wednesday was the market’s worst day in five weeks. The second-worst day was the day before.

  

  If you think that’s bad, for the second quarter of 1932, the market fell more than 1% on each of its first seven trading days!

  What gave Wall Street the shakes this week? Some of the economic news was on the light side. As usual, whenever there’s any hint of danger, traders will storm the lifeboats. It’s really not that big of a deal. I’ll break it all down for you in a bit.

  I’ll also cover this week’s earnings report from RPM International. This may be one of the quietest stocks on the Buy List, but don’t overlook it. Its shares have been in rally mode over the past three months. RPM also announced its 46th consecutive dividend hike. There aren’t many companies like that. I’ll have all the details in a bit. But first, let’s look at what upset Wall Street this week.

  Weak Economic News Rattles the Market

  The new month and quarter began this week. With the turn of the month, we typically get several important economic reports. The ISM Manufacturing Index usually comes out on the first day of the month.

  I like the ISM report because the data is current. It’s a survey rather than hard data. On Tuesday, I wasn’t expecting to see a good report. We already knew that the manufacturing sector has been struggling. Still, the ISM came in at 47.8 which is worse than I expected. It’s the lowest number in more than 10 years.

  Any number below 50 means that the factory sector of the U.S. economy is shrinking. This was the second sub-50 number in a row. To give you an idea of how things have changed, a year ago, ISM reached a 14-year high. The details of the report aren’t encouraging.

  The group said just three of 18 industries reported growth in September, the lowest total since April 2009. Contracting industries were led by apparel, leather and allied products; printing and related support activities; and wood products. The only expansions were in miscellaneous manufacturing; food, beverage and tobacco products; and chemical products.

  ISM’s measure of new orders, considered a leading indicator of downturns, edged up slightly to 47.3 from an August reading that matched the weakest of this expansion. The production index declined to 47.3, while the inventories gauge fell to 46.9, the lowest since late 2016.

  The ISM Manufacturing Report also has a decent track record of lining up with recessions, but we’re still above the danger zone. Generally, recessions happen when the ISM drops below 45. So, we’re not in a recession, but growth may be slowing down.

  I should add that this is simply for the manufacturing sector of the economy. The economy has had periods of strong growth with soggy ISMs. The 1990s is a good example.

  The problem is that on Thursday, we got the ISM Non-Manufacturing Report, and it was also below expectations. The reading was 52.6 which was the lowest in three years. Wall Street had been expecting 55. Since it’s above 50, we know that the Non-Manufacturing sector is still expanding, but it challenges the theory on Wall Street that the consumer is holding up the economy while the factory sector is in a recession.

  Until this week, it had been popular to believe that the Fed might not be in such a hurry to cut rates again. They’ve already done so twice, but would a third be necessary? There were three dissents at the last meeting. Charles Evans, the top guy at the Chicago Fed, said that the latest numbers haven’t convinced him to cut rates again. The Atlanta Fed now estimates that the economy grew by 1.8% for Q3.

  The FOMC meets again at the end of this month. At the start of the week, the futures markets thought there was a 40% chance of a Fed cut in October. Thanks to this week’s news, the odds of a rate cut are now up to 88%.

  The big news for this week will be the jobs report which is due out later this morning. The consensus is that the economy created 146,000 net new jobs. On Wednesday, we got the ADP payroll report which is an imperfect preview of the government’s official report.

  ADP said that the U.S. economy added 135,000 private jobs last month. That was 10,000 more than expected. That’s the good news. The bad news is that the numbers for August were revised lower. The economy is still creating jobs, but the rate of increase is slowing.

  On Thursday, the initial jobless claims report fell to 219,000. That’s still quite good. In fact, jobless claims have been mostly in a range between 210,000 and 230,000 for much of the last eight months.

  After Thursday morning’s initial drop, stocks rallied. Forgive me if this sounds bizarre, but stocks rallied on the bad news. Not because of the bad news itself, but because the bad news would spur the Fed to act, and that’s good news. I feel like we need Abbott and Costello to sort this out.

  This week, the World Trade Organization cut its forecast for trade growth for this year and next. The big worry is that the trade spat between the U.S. and China could push the global economy into a recession. In that case, there’s not much that the Fed can do with rate cuts. It would be like pouring gasoline into a car that doesn’t have any wheels.

  The bond market is feeling the pressure as well. In early September, the 10-year yield was going for less than 1.5%. By September 13, the yield had shot up to 1.90%. But the bond market made a U-turn and yields are plunging again. On Thursday, the 10-year yield closed at 1.54%.

  The difference this time is that the yield curve has re-inverted. By that, I mean that even though the 10-year yield is down, the two-year yield has fallen even faster. Much faster. This week, the two-year yield fell to its lowest level since October 2017. As a result, the spread between the two and the ten is the widest it’s been since early August.

  

  Remember how in August everyone freaked out about the Great Yield Curve Inversion of 2019? Well, that lasted for about one week. (See Charlie Munger’s words in this week’s epigraph.)

  RPM International Beats by Three Cents per Share

  On Wednesday, RPM International (RPM) released its fiscal Q1 earnings report, and the news was mixed. Let’s start with the good news. For the first three months of its fiscal year, RPM earned 95 cents per share. That was three cents more than expectations. Net sales were $1.47 billion compared to $1.46 billion for last year.

  “We continued to experience the benefits of the plant rationalization, manufacturing improvements and center-led procurement initiatives of our 2020 MAP to Growth operating improvement plan during the quarter. These actions resulted in adjusted EBIT and EPS performance that met our projections despite modest top-line sales growth,” stated RPM chairman and CEO Frank C. Sullivan. “As we anticipated in July, sales growth was modest as a result of an extremely wet June that slowed painting and construction activity in North America and unfavorable foreign exchange. We were encouraged to see our restructuring program drive significant EBIT margin improvement across all of our segments. On a consolidated basis, our adjusted EBIT margin improved 260 basis points.”

  RPM’s guidance wasn’t terrible, but it could have been better. For Q2, RPM expects sales to rise by 2% to 3% and EPS to be in the “low- to mid-70-cent range.” Let’s say that’s 72 to 75 cents per share. Wall Street had been expecting Q2 earnings of 76 cents per share.

  RPM is reaffirming its previous guidance for the full year; however, the company now expects revenue growth to be at the low end of its range of 2.5% to 4%. RPM is standing by its projected adjusted EBIT growth, which is between 20% and 24%. For 2020 EPS, RPM still sees earnings ranging between $3.30 and $3.42 per share.

  The important thing is that RPM did not cut its EPS guidance. The shares initially dropped on Wednesday but eventually rallied and closed a little bit higher, while the rest of the market was down. RPM closed higher on Thursday as well.

  On Thursday, RPM increased its dividend for the 46th year in a row. The quarterly payout will rise from 35 to 36 cents per share. Only 41 companies have longer dividend-hike streaks. Based on Thursday’s closing price, RPM now yields 2.14%.

  Since late May, RPM has rallied 24.1% for us, while the S&P 500 is up just 3.1%. I’m keeping my Buy Below prices at $71 per share.

  

  Before I go, I want to make two minor changes to our Buy Below prices. This week, I’m lowering our Buy Below on Cognizant Technology Solutions (CTSH) to $64 per share. I’m also lowering our Buy Below on Cerner (CERN) to $71 per share. Nothing is wrong with either company. I’m just updating these numbers to reflect the current market.

  That’s all for now. Third-quarter earnings seasons is set to begin soon. There are a few key economic reports to look forward to next week. On Wednesday, the Fed will release the minutes of their last meeting. This was an important meeting because the Fed cut rates and there were three dissensions. That’s unusual. Then on Thursday, the CPI report for September is due out. I’ll be curious about what it has to say, because core inflation has been running hot. 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 4, 2019
  Eddy Elfenbein, October 4th, 2019 at 7:04 am

  U.S. Stock Futures Slip, Bonds Edge Up Before Jobs

  ‘Sahm Rule’ Enters Fed Lexicon as Fast, Real-Time Recession Flag

  Don’t Trust China to Make Our Subway Cars, Warns Industry

  A Broken System Helped the FCC Kill Net Neutrality. It Afflicts the Whole Government.

  Why Trump Just Made Your Dinner More Expensive

  Apple to Increase iPhone 11 Output by Up to 10%, Nikkei Reports

  SoftBank’s Plans for Second Mega-Fund Hit by WeWork Debacle

  U.S. Helps Mastercard, Visa Score Victory in Indonesia in Global Lobbying Effort

  ‘Feeding Frenzy’: How New Yorkers Plundered the Chicago Taxi Trade

  Square Opens Up Payment Processing To More CBD Businesses

  HP to Cut 9,000 Jobs in Global Overhaul

  ‘Joker’ Movie Is a Risk, but a Calculated One, for Warner Bros.

  Ben Carlson: The Great Fee War of the 2010s

  Joshua Brown: Dangerous Shortage of Idiots Threatens Economy!

  Jeff Carter: Risk, Commercial Real Estate and We Work & Hour of Champions

  Be sure to follow me on Twitter.

• The ISM Non-Manufacturing Falls
  Eddy Elfenbein, October 3rd, 2019 at 12:20 pm

  Yesterday the stock market had its worst day in the past five weeks. The day before was the second-worst day.

  The S&P 500 marked its first back-to-back drops of more than 1% since December. We’re still a long way from matching what we saw late last year. In December, there were four 1% drops in a row, and six in seven days.

  At its low, the S&P 500 was down 1.4% today.

  On Tuesday, the market was shocked by the worst ISM Manufacturing report in more than a decade. This morning, we got the ISM Non-Manufacturing report and it was a disappointment. The reading was 52.6 which was the lowest in three years. Wall Street had been expecting 55.This is noteworthy because the non-manufacturing sector had been holding up well despite weak manufacturing data. It looks like the Fed may act again.

  At the start of the week, futures traders saw a 40% chance of another Fed rate cut. Now the odds are up to 75%. We’ll learn a lot more with tomorrow’s jobs report.

  Here’s an interesting chart. The 10-year yield is in red (right scale). The black line is the S&P High Beta divided by the S&P 500 (left scale).

  

• Morning News: October 3, 2019
  Eddy Elfenbein, October 3rd, 2019 at 7:32 am

  Trade Fears, Growth Woes Haunt Global Stocks as Bond Yields Slide

  E.U.’s Top Court Rules Against Facebook in Global Takedown Case

  Scottish Whisky Makers Reel Over U.S. Tariffs In Row Over EU Subsidies

  Hong Kong Takes Symbolic Stand Against China’s High-Tech Controls

  U.S. Jobs Outlook Is So Weak It Echoes Months When Disasters Hit

  Slumping Data May Force Powell to Move to Third Cut

  Everything Is Private Equity Now

  Chaos Scientist Finds Hidden Financial Risks That Regulators Miss

  Chevron’s Shale Allies Are Its Secret Weapon in Exxon Race

  Vice Media Acquires Refinery29 in a $400 Million Deal

  FAA Allows UPS to Deliver Medical Packages With Drones

  Uber Makes JFK Airport Helicopter Taxis Available to All Users

  Michael Batnick: Animal Spirits: Free Trading & Advice for New Readers

  Roger Nusbaum: Free Trading Goes Mainstream

  Joshua Brown: Congraduritos! & This Isn’t Exactly a Moon Landing…

  Be sure to follow me on Twitter.

• The Dow Drops 300; ADP Beats Estimates
  Eddy Elfenbein, October 2nd, 2019 at 10:14 am

  The Dow took a stumble this morning. The big event for this week is the September jobs report which comes out on Friday. Yesterday’s weak ISM Manufacturing report clearly spooked the market.

  This morning, we got a preview of Friday’s jobs data. ADP released its private payroll report for September. This report isn’t always a good match for the official numbers we’ll get on Friday.

  Having said that, ADP said that the U.S. economy added 135,000 private jobs last month. That was 10,000 more than expected. That’s the good news. The bad news is that the numbers for August were revised lower. The economy is still creating jobs, but the rate of increase is slowing.

  Now all eyes are focused on Friday morning’s report. The unemployment rate has come in at 3.7% for the last three months. If there are signs of weakness, that could sour the Fed to act.

  Tech and cyclicals are getting dinged the most this morning.

• RPM Earns 95 Cents per Share for Its Q1
  Eddy Elfenbein, October 2nd, 2019 at 9:07 am

  RPM International (RPM) is out with its Q1 earnings this morning. For the first three months of its fiscal year, RPM earned 95 cents per share. That’s three cents more than expectations. Net sales were $1.47 billion compared to $1.46 billion for last year.

  “We continued to experience the benefits of the plant rationalization, manufacturing improvements and center-led procurement initiatives of our 2020 MAP to Growth operating improvement plan during the quarter. These actions resulted in adjusted EBIT and EPS performance that met our projections despite modest top-line sales growth,” stated RPM chairman and CEO Frank C. Sullivan. “As we anticipated in July, sales growth was modest as a result of an extremely wet June that slowed painting and construction activity in North America and unfavorable foreign exchange. We were encouraged to see our restructuring program drive significant EBIT margin improvement across all of our segments. On a consolidated basis, our adjusted EBIT margin improved 260 basis points.”

  For Q2, RPM expects sales to rise by 2% to 3% and EPS to be in the “low- to mid-70-cent range.” Let’s say that’s 72 to 75 cents per share. Wall Street had been expecting Q2 earnings of 76 cents per share.

  RPM is reaffirming its previous guidance for the full year; however, the company now expects revenue growth to be at the low end of its range of 2.5% to 4%. RPM is maintaining its projected adjusted EBIT growth in the 20% to 24% range. For 2020 EPS, RPM still sees that ranging between $3.30 and $3.42 per share.

• Morning News: October 2, 2019
  Eddy Elfenbein, October 2nd, 2019 at 7:34 am

  Global Trade Is Deteriorating Fast, Sapping the World’s Economy

  Markets Slide After Signs of Weakening Trade

  CLOs Stuffed Full of Private Debt to Risky Companies Are Booming

  WTO to Back U.S. Tariffs Over Airbus Subsidies

  Ford Will Put Most of India Operations Into Mahindra Venture

  GM Strike Getting More Expensive, Already Cost $1 Billion

  This Could Be the Next Gold Mine for Tesla and Other Electric Vehicles

  Apple’s Default iPhone Apps Give It Growing Edge Over App Store Rivals

  Samsung Ends Mobile Phone Production in China

  Fitch Downgrades WeWork After Aborted IPO Leaves Financing Hole

  Visa, Mastercard Reconsider Backing Facebook’s Libra

  Johnson & Johnson Agrees to Settle Ohio Opioid Lawsuits for $20.4 Million

  Nick Maggiulli: Are Wealth Taxes A Good Idea?

  Cullen Roche: The Upside of Commission Free Trading

  Ben Carlson: Why “The Economy” is Still Relatively New

  Be sure to follow me on Twitter.

• September ISM Drops to 47.8
  Eddy Elfenbein, October 1st, 2019 at 10:56 am

  We got a shocking report this morning. The ISM Manufacturing Index dropped to 47.8 for September. That’s the lowest in more than 10 years.

  This is important for a few reasons. One is that the ISM report is one of the fastest reports we see. It typically comes out in the first business day of the month and it covers the previous month.

  Compare that to last weeks’s GDP report which covers the period that began six months ago and ended three months ago.

  The second straight reading below 50, the line separating expansion and contraction, extends the drop from a 14-year high just over a year earlier and may add to calls for the Federal Reserve to cut interest rates further. Slowing global growth has damped demand for manufactured goods at home and abroad while trade policy uncertainty has disturbed supply chains and put hiring plans on hold.

  The group said just three of 18 industries reported growth in September, the lowest total since April 2009. Contracting industries were led by apparel, leather and allied products; printing and related support activities; and wood products. The only expansions were in miscellaneous manufacturing; food, beverage and tobacco products; and chemical products.

  ISM’s measure of new orders, considered a leading indicator of downturns, edged up slightly to 47.3 from an August reading that matched the weakest of this expansion. The production index declined to 47.3, while the inventories gauge fell to 46.9, the lowest since late 2016.

  The ISM report also has a decent track record of lining up with recessions. Generally, recessions happen when the ISM drops below 45. While any reading under 50 means the factory sector is contracting, the real pain starts around 45.

  A few caveats. One is that it just covers manufacturing. The rest of the economy may be doing fine. For August, personal consumption rose by just 0.1%, but we don’t have the numbers for September just yet.

  Also, the economy has had periods of strong growth with soggy ISMs. The 1990s is a good example.

• Morning News: October 1, 2019
  Eddy Elfenbein, October 1st, 2019 at 7:32 am

  World Economy Sends Up Flares on a Mounting Factory Crisis

  W.T.O. Forecasts Global Trade Slowdown Amid Uncertainty

  Japan Raises Taxes on Its Spenders Despite Growth Worries

  China Plays ‘Fight the Landlord’ to Tame Hong Kong

  Norway Unexpectedly Withdraws Cash From Massive Wealth Fund

  Goldman Sachs’s Year of Frantic Upheaval and Same Old Problems

  Credit Suisse Chief Operating Officer Resigns Over Surveillance Scandal

  WeWork Throws in the Towel on Its Ill-Fated IPO

  Comcast Emerges as New Google Antitrust Foe

  Me and My Whistle-Blower

  TSMC Counter-Sues U.S. Chip Rival GlobalFoundries for Patent Infringement

  How to Avoid Being Fleeced When Using a Credit Card Overseas

  Jeff Miller: Stock Exchange: ETFs Kill Fundamentals, Technicals Matter

  Jeff Carter: Sucking All the Oxygen Out of the Room

  Joshua Brown: Most Emerging Markets Indexes are Often China Funds in Disguise & Building the Bloomberg for Sports Betting

  Be sure to follow me on Twitter.