Archive for January, 2020

• Eagle Is “undervalued and priced for low-to-mid teens total returns”
  Eddy Elfenbein, January 21st, 2020 at 11:08 am

  A reader passed along a thoughtful article on Eagle Bancorp (EGBN) at Seeking Alpha.

  Here’s the conclusion, but I recommend reading the whole thing:

  Eagle has a strong performance track record in the D.C. area, and I continue to view that as an attractive market for a CRE-oriented commercial bank. D.C.’s construction market has historically offered respectable (if not good) growth, with less cyclicality than most other markets, as the presence of the government effectively supports the market. While Eagle isn’t shockingly cheap today, I do like the long-term prospects for mid-single-digit loan growth and mid-to-high single-digit core earnings growth, with M&A a possible source of upside as well.

  

• Morning News: January 21, 2020
  Eddy Elfenbein, January 21st, 2020 at 7:10 am

  IMF Finds New Reasons to Worry About the Global Economy

  CEOs Are More Pessimistic About the Global Economy Than They’ve Been in 8 Years

  Trump Acclaims His Own Economic Achievements: Davos Update

  China Virus Sends Shiver Through Markets as Risks Mount

  Hedge Funds Not Led by White Men Outperform Peers Nearly 2 to 1

  Africa’s Richest Woman Is Barred From Her Bank and Under Investigation

  India Targets Jeff Bezos Over Amazon and Washington Post

  Apple Dropped Plan for Encrypting Backups After FBI Complained

  Apple Lawsuit Tests If An Employee Can Plan Rival Startup While on Payroll

  The Tokyo Job: Inside Carlos Ghosn’s Escape to Beirut

  A $4 Billion Mine Was Meant to Lift Northern England. Instead Locals Lost Big

  Michael Batnick: Ain’t So Bad

  Roger Nusbaum: Don’t Wait To Solve Your Problems

  Howard Lindzon: Momentum Monday – Remember The Tariffs?

  Ben Carlson: Where the Magic Happens in the Stock Market & How to Write a Book in Your Spare Time

  Be sure to follow me on Twitter.

• Morning News: January 20, 2020
  Eddy Elfenbein, January 20th, 2020 at 7:08 am

  Feel Good Factor Keeps World Stocks Near Record Highs, Oil Jumps

  Capitalism Draws Fire Despite Strong Global Economy

  Oil Advances to One-Week High as Unrest Hits Iraq and Libya

  The Man Who Cut Libya’s Oil Supply Is Getting Harder to Handle

  China’s Economic Strength Hidden In Its Weakest Growth Rate In 29 Years

  Palladium Bulls Refuse to Blink

  Trump’s China Deal Creates Collateral Damage for Tech Firms

  France is Making Start-Up Friendly Reforms to Lure Tech Talent and Take on Silicon Valley

  In Its 50th Year, Davos Is Searching for Its Soul

  Climate Change Takes Center Stage in Davos

  How An Exotic Investment Product Sold In Korea Could Create Havoc In The U.S. Options Market

  Apple’s Cook Says Global Corporate Tax System Must Be Overhauled

  Lawrence Hamtil: Breaking Down 50 Years of Industry Data

  Jeff Miller: Weighing the Week Ahead: All Eyes on Earnings

  Michael Batnick: Is This As Good As It Gets For the Stock Market?

  Be sure to follow me on Twitter.

• Housing Starts at 13-Year High
  Eddy Elfenbein, January 17th, 2020 at 12:31 pm

  The stock market will be closed on Monday in honor of Dr. Martin Luther King’s birthday. It will be interesting to see how many traders will want to be net long going into a three-day weekend.

  This morning’s housing starts report showed an increase of 16.9% last month. Housing starts are now at a 13-year high. That’s good news for a stock like Trex (TREX) which is at another new high today.

  The Federal Reserve said that industrial production fell 0.3% in December. Part of the reason why is that utilities dropped by 5.6% due to unseasonably warm weather.

  China said its economy grew by 6.1% last year. That would be great for the U.S. but for China, it’s actually the slowest rate in 29 years.

• CWS Market Review – January 17, 2020
  Eddy Elfenbein, January 17th, 2020 at 7:08 am

  “The dangers of life are infinite, and among them is safety.” — Goethe

  On Thursday, the S&P 500 closed above 3,300 for the first time ever. If you’re into numerology, the index first broke 330 in 1987, meaning 33 years ago, and it first broke 33 in 1954 which was 33 years before that. I don’t know what it means, but that’s a lot of threes.

  In any event, not only is the market moving higher, but it’s been a fairly broad rally. That’s always a good sign. I tend to be suspicious when a market rally leans heavily on just a few stocks. This time, the minnows are joining in. Right now, the number of stocks in the S&P 500 that are above their 200-day moving average is at a five-year high.

  

  The S&P 500 is divided into eleven sectors. Eight are currently at or near new 52-week highs. Two more aren’t that far away. Only Energy is lagging behind, and even that sector has perked up this year.

  Here’s another cool stat: The stock market hasn’t had a down election year when an incumbent was running in 80 years.

  This week, we got our first earnings report of this season. Eagle Bancorp missed by a penny per share. (Or more accurately, analysts missed reality.) Despite the miss, the bank’s doing just fine. I’ll have more in a bit. I also have a complete Buy List earnings calendar for you. But first, let’s look at some recent economic news.

  The Lowest Jobless Rate in Half a Century

  Last Friday, the government released the jobs report for December. The U.S. economy created 145,000 net new jobs which was below expectations of 160,000. The unemployment rate fell to its lowest level since June 1969.

  The labor market is doing well. The government also tracks a broader measure of employment called the U-6 rate. For December, that rate fell to 6.7% which is the lowest rate since the data series was first tracked in 1994.

  The weak spot, however, is wages. To be fair, we’re seeing some improvement here, but we need to see more. Over the past year, average hourly earnings are up by 2.9%. That’s more than inflation, but not by much. Bear in mind that higher wages will eventually translate into higher sales and profits for our companies.

  We may be seeing evidence that workers are in demand. There was a recent story that Taco Bell is willing to pay general managers $100,000 per year. The company will also start paying employees 24 hours of sick time each year.

  Here’s a look at nonfarm payrolls over the last decade. People who aren’t in finance would be astounded if they knew how much time and energy goes into forecasting this line.

  

  Here’s a remarkable look at how the U.S. economy has changed. If we were to have the same jobs-to-population ratio that we had 20 years ago, we’d need 8.8 million more jobs. We could also achieve it if we had 13 million fewer people. What’s changed is that there are many more retirees.

  Despite the lackluster wage gains, consumers were still out at the malls spending money. On Thursday, the Commerce Department said that December retail sales rose by 0.3%. Also, retail-sales growth for November was revised higher to +0.3%. This suggests that the U.S. economy ended 2019 at a moderate pace. In the last year, retail sales grew by 6.1%. That’s close to the fastest pace since 2012.

  Remember that consumer spending accounts for two-thirds of the economy. Economists like to watch “core” retail sales, which excludes cars, gas, building materials and food. For December, the core rate was up +0.5%. That’s quite good, and it’s an improvement over the 0.1% increase we had for November.

  In fact, the strong jobs market may continue. The recent jobless-claims report fell to 204,000. That’s very good.

  Fortunately, there’s been no evidence yet of an uptick in inflation. On Tuesday, the government said that the Consumer Price Index rose by 0.2% last month. That comes after a 0.3% increase in November. For all of 2019, the CPI increased by 2.3%. That’s the highest annual rate in eight years, but it’s still not that high. Importantly, inflation is still close to the Federal Reserve’s target of 2%.

  Digging into the numbers a bit, we see that the “core” rate of inflation increased by 0.1% last month. This is the regular inflation rate, except for food and energy prices, which can be very volatile. The core rate was up by 0.2% in November. For the year, the core rate increased by 2.3%.

  Overall, these are good numbers, and it looks like the Federal Reserve won’t need to make a move, in either direction, in the immediate future. It’s especially impressive that inflation is so low considering that the unemployment rate is low as well.

  The Fed meets again in two weeks. Don’t expect much. In my opinion, the best market proxy for what the Fed will do is the two-year Treasury yield. On Thursday, the two-year yield closed at 1.58%, and that’s right in line with the Fed’s current target of 1.50% to 1.75%.

  With the Fed now in reserve, let’s look at our upcoming earnings reports.

  Fourth-Quarter Earnings Calendar

  Here’s a table of the 21 Buy List stocks that are reporting this earnings season (the other four don’t follow the March/June/September/December cycle). I’ve included each stock’s earnings date, Wall Street’s consensus and the actual results. Please note that not all the dates are out, and the earnings consensus may change.

  Company	Symbol	Date	Estimate	Result
  Eagle Bancorp	EGBN	15-Jan	$1.07	$1.06
  Silgan Holdings	SLGN	28-Jan	$0.38
  Stryker	SYK	28-Jan	$2.46
  Danaher	DHR	30-Jan	$1.24
  Hershey	HSY	30-Jan	$1.24
  Sherwin-Williams	SHW	30-Jan	$4.39
  Church & Dwight	CHD	31-Jan	$0.55
  Check Point Software	CHKP	3-Feb	$1.99
  AFLAC	AFL	4-Feb	$1.02
  Disney	DIS	4-Feb	$1.48
  Fiserv	FISV	4-Feb	$1.14
  Cerner	CERN	4-Feb	$0.74
  Globe Life	GL	5-Feb	$1.72
  Intercontinental Exchange	ICE	6-Feb	$0.96
  Becton, Dickinson	BDX	6-Feb	$2.64
  Moody’s	MCO	12-Feb	$1.94
  ANSYS	ANSS	tba	$1.98
  Broadridge Fin Solutions	BR	tba	$0.72
  Middleby	MIDD	tba	$1.72
  Stepan	SCL	tba	$0.88
  Trex	TREX	tba	$0.51

  Eagle Bancorp Earned $1.06 per Share

  Now let’s look at our first earnings report. After the close on Wednesday, Eagle Bancorp (EGBN) reported Q4 earnings of $1.06 per share. That’s one penny below estimates, and it’s down from $1.17 per share from one year ago.

  For all of 2019, Eagle made $4.18 per share. That’s down from $4.44 per year in 2018. The big issue I’ve been watching is Eagle’s legal fees. For Q4, the bank’s legal, accounting and professional fees and expenses rose 68% to $4.1 million. That’s about 12 cents per share.

  Here’s what Eagle had to say:

  The Company expects to continue to incur elevated levels of legal and professional fees and expenses in 2020 as it continues to cooperate with these investigations. Other than these increased costs, we do not believe at this time that the resolution of these investigations will be materially adverse to the Company. As a result of these ongoing investigations, there have been no regulatory restrictions placed on the Company’s ability to fully engage in its banking business as presently conducted. We are, however, unable to predict the duration, scope or outcome of these investigations.

  Looking past these expenses, the bank is doing fine. For Q4, Eagle had a return-on-equity of 11.78%. The bank’s efficiency ratio was 39.7% for the quarter and 40% for the entire year. The legal expenses aren’t pleasant, but it’s a manageable problem. The market clearly over-reacted. Over the summer, the shares plunged $14 per share on the news.

  Eagle opened Thursday’s trading down more than 3%, but it quickly righted itself and closed lower by just 0.3%. This is a good bank that’s sailing through some rough seas. Eagle remains a buy up to $53 per share.

  Buy List Updates

  Danaher (DHR) won’t report earnings until January 30. However, the CEO made some relevant comments at a healthcare conference this week. CEO Thomas P. Joyce, Jr. said that for Q4, Danaher’s sales will come in above the company’s previously-announced expectations. He also said that earnings will be “at or above” the high end of their range.

  Allow me to translate. When a CEO says, “at or above,” they mean “above.”

  Speaking of Danaher, it, along with a few other of our stocks like Moody’s (MCO) and Fiserv (FISV), has crept above our Buy Below prices. So has Trex (TREX), one of our newbies. It’s already up 11% in 11 trading days. I’m going to hold off adjusting our Buy Below prices until I get a chance to see their earnings reports. As always, there’s never a need to chase after good stocks. You always want to be a disciplined investor.

  That’s all for now. The stock market will be closed on Monday in honor of Dr. Martin Luther King, Jr.’s birthday. Dr. King would have been 91. Next week will be dominated by earnings news. There’s not much in the way of economic reports next week. On Wednesday, the new-homes sales report is out. Then on Thursday, the jobless-claims report comes out. The last report was for 204,000, which is a very low number. 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: January 17, 2020
  Eddy Elfenbein, January 17th, 2020 at 7:04 am

  China’s Economic Growth Hits 30-Year Low

  China’s Improving Economic Data Masks Deeper Problems

  China’s Birthrate Hits Historic Low, in Looming Crisis for Beijing

  U.S. Passes Global Growth Baton to Rest of World, For Now

  The Debate Over Whether to Call It QE Is Over, and the Fed Lost

  Trump Fans or Not, Business Owners Are Wary of Warren and Sanders

  Banks That Shun Risky Borrowers Offer Rosy View of U.S. Consumer

  Google Reaches $1 Trillion in Value, Even as It Faces New Tests

  Temasek, Trustbridge Target Majority Stake in WeWork China at $1 Billion Valuation

  Sinopec to Review Potential $16 Billion U.S. Gas Deal With Cheniere

  Tesla Overruns German Forest in Attack on Auto Establishment

  Facebook Foes Sue to Force Zuckerberg to Sell Majority Stake

  Ben Carlson: Updating My Favorite Performance Chart For 2019

  Roger Nusbaum: I Got Ratio’d On Twitter Big Time & Learned A Ton

  Joshua Brown: The “Trade Deal” is Hilarious, Bond Market Doesn’t Bite & Dow 29,000 and the Markets Are Grinding Away

  Be sure to follow me on Twitter.

• The Gold Bubble 40 Years On
  Eddy Elfenbein, January 16th, 2020 at 8:57 am

  Next week will mark the 40th anniversary of gold’s peak, on January 21 to be exact.

  Since then, gold is down one-third in real terms (gold has nearly doubled while inflation has tripled).

  Here’s the price of gold adjusted to today’s dollars:

  

  What’s interesting is that gold seems to move in decade-long patterns that are either really good or really bad. Not much in between.

• December Retail Sales Rose by 0.3%
  Eddy Elfenbein, January 16th, 2020 at 8:45 am

  This morning, the Commerce Department said that December retail sales rose by 0.3%. This report is important to watch because it’s often a good indicator of consumer spending. Also, retail sales growth for November was revised higher to +0.3%.

  This suggests that the U.S. economy ended 2019 at a moderate pace.

  Excluding automobiles, gasoline, building materials and food services, retail sales jumped 0.5% last month after falling by a downwardly revised 0.1% in November.

  The so-called core retail sales correspond most closely with the consumer spending component of gross domestic product. They were previously reported to have edged up 0.1% in November.

  Consumer spending accounts for two-thirds of the economy.

  Growth estimates for the fourth quarter are as high as a 2.5% rate, in part because of a drop in imports, which compressed the trade deficit.

  In December, auto sales fell 1.3%, the biggest drop since last January, after increasing 1.5% in November. Higher gasoline prices lifted receipts at service stations, which jumped 2.8%. Online and mail-order retail sales rose 0.2% after being unchanged in November.

  Sales at electronics and appliance stores rebounded 0.6% in December. Receipts at building material stores surged 1.4% and sales at clothing stores accelerated 1.6%. Spending at furniture stores edged up 0.1%.

  Americans also spent more at restaurants and bars, with sales rising 0.2% last month. Spending at hobby, musical instrument and book stores rebounded 0.9%.

  Also, weekly jobless claims fell to 204,000. That’s a very good number.

• Morning News: January 16, 2020
  Eddy Elfenbein, January 16th, 2020 at 7:14 am

  What’s In (and Not In) the U.S.-China Trade Deal

  The $95 Billion Centerpiece of the Trade Deal Is Already In Doubt

  Trump Hopes Trade Deals Will Boost Growth. Experts Don’t Agree.

  Trump Tax Break That Benefited the Rich Is Being Investigated

  In Huawei Battle, China Threatens Germany ‘Where It Hurts’: Automakers

  Will Beyond Meat Get Nibbled to Death?

  Comcast, Late to the Streaming Party, to Give Details of NBC’s Peacock Service

  Nissan Is in Trouble. Carlos Ghosn May Deserve the Blame.

  Hyundai, Kia Invest $110 Million in UK Electric Van Startup Arrival Ltd

  BlackRock’s Assets Blow Past $7 Trillion in Milestone for Investment Giant

  Nobody Makes Money Like Apollo’s Ruthless Founder Leon Black

  Flash Crash Culprit Seen as Childlike Gamer Not Fit for Prison

  Ben Carlson: The Relationship Between War & The Stock Market

  Howard Lindzon: Fintech On Fire…No Surprise To Us Here

  Jeff Carter: Markets And Preferences And Longevity

  Be sure to follow me on Twitter.

• Eagle Bancorp Earned $1.06 per Share
  Eddy Elfenbein, January 15th, 2020 at 4:32 pm

  After the close, Eagle Bancorp (EGBN) reported Q4 earnings of $1.06 per share. That’s one penny below estimates. It’s also down from $1.17 per share from one year ago.

  For all of 2019, Eagle made $4.18 per share. That’s down from $4.44 per year in 2018.

  “Notwithstanding the negative impact that declining interest rates in the second half of 2019 and a flat yield curve are having on our revenues and net interest margin, we are pleased to report a continued trend of both average loan and deposit growth, together with continuing solid asset quality and favorable operating leverage. Additionally, our capital base remains very strong, with ratios well in excess of the requirements for well capitalized status,” noted Susan G. Riel, President and Chief Executive Officer of Eagle Bancorp, Inc. Ms. Riel added that “While period end loan balances in the fourth quarter 2019 were flat as compared to September 30, 2019, average loans increased 0.5% over the third quarter of 2019 and were 9% higher in the fourth quarter of 2019 as compared to the fourth quarter of 2018. In the fourth quarter of 2019 the funding of construction loans tapered off as expected and we experienced higher loan payoffs. These payoffs (which accounted for about 40% of the full year of 2019 payoffs) were expected and reflected in part the successful completion of projects. Funding of C&I loans improved during the quarter and the loan pipeline remained strong. For the full year of 2019, loan balances increased 8% while average loans increased 10% over 2018, close to planned levels.”

  Ms. Riel added, “Deposit activity in the fourth quarter 2019 was very fluid as period end balances declined by about 2% as compared to September 30, 2019, however, average deposit balances increased a strong 5% in the fourth quarter 2019 over the third quarter in 2019. We have many large depositor clients whose balances fluctuate regularly and can impact overall deposit levels at a point in time. We focus more on growing average balances, which more directly relate to revenue. For the fourth quarter of 2019, average deposits were 11% higher as compared to the fourth quarter in 2018. For the full year 2019, deposit balances increased by 4%, while average deposit balances increased a strong 12%.”

  The shares are down a little over 1% after hours.

  More details:

  Ms. Riel further commented, “For the fourth quarter of 2019, as noted, we experienced very strong growth of average deposits as compared to minimal loan growth, resulting in significantly higher average liquidity. This higher average liquidity ($739 million for the fourth quarter of 2019 vs. $306 million normalized average for the first three quarters of 2019) contributed to a decline in the net interest margin to 3.49% for the fourth quarter from 3.72% in the third quarter of 2019. The higher liquidity position in the fourth quarter resulted in an average loan to deposit ratio of 98% as compared to 102% for the third quarter of 2019. Also contributing to the decreased net interest margin for the fourth quarter was a 21 basis point decline in the yield on the loan portfolio to 5.18% versus 5.39% for the third quarter 2019, largely due to the sharp decline in the one month average LIBOR interest rate in the fourth quarter (down 39 basis points to 1.79%). Approximately 40% of the Bank’s loan balances are on notes indexed to this LIBOR rate.” Ms. Riel added, “While we were able to realize declines in our cost of funds as market rates declined in the fourth quarter of 2019 (13 basis points from 1.28% to 1.15%), the variable rate nature of our loan portfolio has resulted in a sharper decline in asset yields than in the cost of funds. Importantly, our credit quality remained very strong in the fourth quarter as the level of nonperforming assets was 0.56% of total assets at December 31, 2019 and the annualized level of net charge offs to average loans was 0.13%.” Ms. Riel added, “The Company’s operating efficiency, another key driver of our financial performance, remained favorable.” For the fourth quarter in 2019, the efficiency ratio was 39.7%, as compared to 36.1% in the fourth quarter of 2018, and was 40.0% for the full year 2019, which is inclusive of elevated legal costs as discussed below.

  Combining all operating factors for the fourth quarter 2019, the company achieved a return on average assets of 1.49%, a return on average common equity of 11.78%, and a return on average tangible common equity ratio of 12.91%, while sustaining strong capital levels.

  For the full year 2019 over 2018, average deposit growth was 12%, average loan growth was 10%, revenue growth was 3% and noninterest expense growth was 10%. The net interest margin for 2019 was 3.77% as compared to 4.10% for the year 2018. While lower, we believe our net interest margin for 2019 remains above peer banking companies. Period end to period end, loan growth in 2019 was 8% and deposit growth was 4%.