Archive for June, 2020

• Morning News: June 9, 2020
  Eddy Elfenbein, June 9th, 2020 at 7:11 am

  U.S. Failed to Properly Oversee Chinese Telecom Carriers: Senate Panel

  Behind China’s Twitter Campaign, a Murky Supporting Chorus

  Prepping Portfolios for Next Market Storm? Not Just Gold and Govvies

  Stock Markets in Europe Fall. Wall Street May Follow.

  Despite Recession, Stock Markets Turn Positive for the Year

  Once Bitten, Not Shy: Investors Again Seek Margin Loans As Stocks Rally

  Debt Shakeout Poised to Make FAANG, Giant Retailers Even Bigger

  Apple Plans to Announce Move to Its Own Mac Chips at WWDC

  IBM Exits Facial Recognition Business, Calls for Police Reform

  TSMC Scores Subsidies and Picks Site for $12 Billion U.S. Plant

  In India, the YouTube-TikTok Rivalry Turns Nasty

  Michael Batnick: The Fastest Stock Market Ever & How to Talk to Your Friend About Picking Stocks

  Roger Nusbaum: You’re Not Smarter Than Stanley Druckenmiller

  Cullen Roche: What if the Stock Market is Exactly Right?

  Howard Lindzon: The Rarest Asset of All…Time

  Be sure to follow me on Twitter.

• Positive for the Year
  Eddy Elfenbein, June 8th, 2020 at 8:08 pm

  Thanks to a big push over the last few days, the S&P 500 is now positive for the year.

  Well, it’s barely positive…but it’s still positive. For the year, the S&P 500 is up 0.05%. That means for every $20 you invested in the index, you now have a profit of one penny!

  Of course we can compare that with a few weeks ago when the index was down 30%!

  

• Mistakes in the Jobs Report
  Eddy Elfenbein, June 8th, 2020 at 10:50 am

  The monthly jobs report has unfortunately become politicized. Prominent figures on both sides have accused the other of cooking the data. This is baseless conspiracy thinking.

  Interestingly enough, the BLS admitted that the data in Friday’s report was incorrect. They put out the wrong data with an explanation. The BLS will revise the figures next month. They don’t do it immediately in order to avoid the appearance of political pressure.

  When the U.S. government’s official jobs report for May came out on Friday, it included a note at the bottom saying there had been a major “error” indicating that the unemployment rate likely should be higher than the widely reported 13.3 percent rate.

  The special note said that if this “misclassification error” had not occurred, the “overall unemployment rate would have been about 3 percentage points higher than reported,” meaning the unemployment rate would be about 16.3 percent for May. But that would still be an improvement from an unemployment rate of about 19.7 percent for April, applying the same standards.

  The Bureau of Labor Statistics, the agency that puts out the monthly jobs reports, said it was working to fix the problem.

  Instead of some conspiracy, I think it’s simply hard to get accurate data during such extreme events.

• Nine Wins in Eleven Sessions
  Eddy Elfenbein, June 8th, 2020 at 10:36 am

  The stock market is up again this morning. This could be the ninth up day in the last 11 sessions. We’re also seeing a continuation of the theme of strong cyclical stocks. The Energy Sector is doing very well so far. Industrials and Financials are also leading the pack. This may suggest that Wall Street believes the economy has turned around. We’ll see.

  The Federal Reserve meets tomorrow and on Wednesday. This meeting will also have a press conference by Chairman Powell. I don’t expect any major policy changes from the Fed, but it will be interesting to hear what Powell has to say.

  I want to reiterate a point I made in the newsletter — cyclicals stocks are starting to lead the market impressively over the last month. This could suggest Wall Street sees a faster-than-expected recovery.

  

  The graph above is the four main cyclical sector ETFs divided by the SPY. Notice also that the 2/10 Spread has gotten wider.

• Morning News: June 8, 2020
  Eddy Elfenbein, June 8th, 2020 at 7:05 am

  U.S. Shale Companies Are Turning the Oil Taps Back On

  Stock Markets Drift Lower in a Bad Sign for Wall Street

  Fed Says Beating Pandemic Is Key, But How Will It Know Things Are Better?

  U.S. Fed’s Main Street Lending Facility Likely To Start With A Whimper

  Morgan Stanley Makes New Bet on a Steepening U.S. Yield Curve

  Local Austerity Will Hold Back U.S. Rebound Like It Did in 2010

  Scarred and Scared: Post-Covid Consumers Not Their Old Selves

  Farmers Get Billions in Virus Aid, and Democrats Are Wary

  Airlines Got $25 Billion in Stimulus; Industry Still Expected to Shrink

  ‘Corporate America Has Failed Black America’

  This Week In Business: The Fight Over Inflammatory Language

  Reebok And Athletes Cut Ties With CrossFit Over Founder Greg Glassman’s George Floyd Tweet

  Joshua Brown: 10% of Jobs Lost Due to the Virus Have Come Back in May

  Michael Batnick: Animal Spirits Talk Your Book: How to Make Better Financial Decisions With Daniel Crosby & Automate Automate Automate

  Ben Carlson: The Craziest Charts of the Year (So Far) & The 2020 Stock Market By the Numbers

  Cullen Roche: What if the Stock Market is Exactly Right?

  Be sure to follow me on Twitter.

• May Jobs Report
  Eddy Elfenbein, June 5th, 2020 at 8:57 am

  Here’s the May jobs report. There was a gain of 2.5 million for nonfarm payrolls. The unemployment rate fell to 13.3%. Economists had been expecting 19%.

  Employment stunningly rose by 2.5 million in May and the jobless rate declined to 13.3% according to data Friday from the Labor Department that was far better than economists had been expecting and indicated that an economic turnaround could be close at hand.

  Economists surveyed by Dow Jones had been expecting payrolls to drop by 8.333 million and the unemployment rate to rise to 19.5% from April’s 14.7%.

  Stock market futures burst higher following the report and indicated an open of nearly 600 points higher for the Dow Jones Industrial Average.

  The May gain was by far the biggest one-month jobs gain in U.S. history since at least 1939.

  

• CWS Market Review – June 5, 2020
  Eddy Elfenbein, June 5th, 2020 at 7:08 am

  “There is scarcely an instance of a man who has made a fortune by speculation and kept it.” – Andrew Carnegie

  This was obviously a tense and distressing week for our country. As usual, I’ll eschew any political commentary, but I will note that despite the drama of recent events, this was a fairly placid week for the stock market—and for our Buy List. On Wednesday, the S&P 500 broke above 3,100 for the first time in three months.

  The S&P 500 closed lower on Thursday, but before then, it had rallied for four days in a row, for seven times in eight sessions. The S&P 500 isn’t too far from an all-time high. In fact, the Nasdaq 100 Index already made a new high this week. (This is an indexed skewed toward large-cap tech companies.)

  Here’s a look at the S&P 500 over the past few weeks:

  

  Our Buy List is also doing well. Eleven of our 25 stocks are positive for the year. At this rate, there’s a good chance that the Buy List as a whole will be positive for the year very soon. On Thursday, Danaher and FactSet both reached new 52-week highs. RPM International got to a new high on Wednesday. Our Buy List is up over 40% from its low.

  In this week’s CWS Market Review, I want to take a closer look at some of the recent economic news. (Warning: It ain’t pretty.) I also want to comment on an emerging trend that’s unfolding just beneath of the surface of the stock market. I’ll also have some updates on our Buy List stocks (Middleby!). But first, let’s look at some terrible, horrible, no good, very bad economic news.

  The Worst Jobs Market in Decades

  I’m sending this newsletter on Friday morning, a few hours ahead of the May jobs report. That means I don’t have the numbers just yet, but I expect they will be very unpleasant. The report for April indicated that 20.5 million Americans had lost their jobs. The unemployment rate jumped to 14.7%. That’s the highest since the great Depression. The report for May should be similarly poor.

  Last week, I mentioned the downward revision to the Q1 GDP report. The day after the GDP report, we typically get the reports on personal income and spending. This time, they were very unusual reports. For April, personal income rose by 10.5% while personal spending decreased by 13.6%. The lockdown has screwed with even boring economic stats. The personal-savings rate soared to 33%. That’s not even close to a typical number for this data series.

  

  This tells you just how unusual the current economic climate is. We’ve never been in a situation where the economy didn’t merely slow down, but froze in place.

  On Monday, we got a look at the ISM Manufacturing report. This report usually comes out on the first business day of the month. I like this report because the lag time is fairly low, although we should be aware that the factory segment of the U.S. economy is no longer its driving force.

  Monday’s report came in at 43.1. That’s actually not so terrible, though it’s not good. That’s up from 41.5 for April, which was an 11-year low. This almost certainly signals that a U.S. recession began in March or April. The National Bureau of Economic Research is the most respected “recession-dating” organization. NBER hasn’t yet made an official announcement on the timing of a recession, but I think they’ll say something before the end of this year.

  By the way, you’ll often hear that a recession is defined as back-to-back quarters of negative economic growth. We’ll most certainly get that when the Q2 GDP number comes out in late July. However, that’s not the correct definition of a recession.

  NBER calls a recession “a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.” The 2001 recession happened without back-to-back quarters of negative growth.

  On Monday, we also learned that construction spending fell 2.9% in April. That’s also bad, but not as bad as it could have been. It’s the lowest number since October 2018.

  On Wednesday, ADP released its report on private payrolls. It showed that the economy lost 2.76 million private-sector jobs last month. As bad as that is, it was much better than expectations.

  This morning’s ADP payroll report showed that the U.S. economy shed 2.76 million jobs last month. As bad as that is, it’s much better than expectations. The ADP report doesn’t always align with the government’s numbers.

  Then on Thursday, the jobless-claims report showed that 1.877 million Americans filed for first-time jobless claims. That marks the ninth decline in a row (meaning a decline in the increase in the number of folks out of work). Economists had been expecting 1.775 million new claims. This was the first time since March 14 that the number came in fewer than two million.

  The economic stats will continue to be poor as long as the economy remains closed. Fortunately, states and localities are gradually reopening. This has to be done with safety as the foremost priority. Only when businesses get back to something resembling normal will we see the economic numbers improve. Hopefully, that will be evident before the end of the summer.

  Has the Cycle Turned?

  I like to keep an eye on how well cyclical stocks are doing. These are companies whose fortunes are closely tied to the economic cycle. Cyclicals tend to move in strong up-down waves, hence the name cyclicals.

  There’s no official definition or even index (that I know of) for cyclicals. Personally, I think of them as the four key cyclical sectors: Financials, Energy, Materials and Industrials.

  Energy and Materials are obvious candidates for this category. In fact, I wouldn’t mind seeing these two sectors merged into one. Call it something like Natural Resources. The Energy sector has fallen so much that I wonder why it’s still a stand-alone sector. These two sectors behave very similarly anyway.

  Industrials are an interesting sector in that they have the strongest correlation to the overall market. In other words, they’re the most like everyone else. As a result, the relative strength of the industrials tends to fluctuate the least.

  You may be surprised that I classify Financials as cyclicals. I think they are, but they’re not pure cyclicals like the others.

  Here’s a look at the relative strength of the ETFs of the four sectors divided by the ETF of the S&P 500. This figure allows us to see how well the cyclicals are doing compared with the rest of the market.

  

  Energy, the black line, is certainly an outlier. However, we can see that all four sectors have lagged the market for a few years. Notice also that they all had prominent bounces a few weeks ago.

  Looking at the relative performance of cyclical stocks is important because it tells us what the market is thinking. Also, once a trend gets established, it can last for several years. It’s not that cyclical stocks are in any sense better than defensive stocks. It’s about where we are in the cycle.

  Cyclical stocks also benefit from a double-whammy effect. This means that they tend to outperform the market when the market itself does well. Conversely, they lag the market when the market does poorly. That’s certainly been the case this year.

  Could this be the start of a long trend? I can’t say just yet, but it wouldn’t surprise me. With cyclicals, the key is spotting when the cycle changes, and it’s been several years since cyclicals have led the charge.

  How do you know if your stock is a cyclical? On our Buy List, it would include businesses like Silgan (SLGN), Danaher (DHR), RPM International (RPM), Stepan (SCL) and Eagle Bancorp (EGBN).

  Wall Street has shifted its thinking toward a cyclical recovery. If that’s correct, then these stocks should continue to prosper. Now let me update you on some of our Buy List stocks.

  Buy List Updates

  Silgan Holdings (SLGN) said it completed the acquisition of the dispensing business of the Albéa Group. This business is a leading supplier of pumps and sprays for the beauty and personal care markets. Last year, the business generated sales of $395 million. Silgan is an 8.9% winner for us this year. SLGN remains a buy up to $36 per share.

  Three weeks ago, I highlighted Middleby (MIDD) and said I liked it below $60 per share. Well, it’s certainly done well since then. On Thursday, MIDD closed near $81 per share. MIDD is close to doubling its low from late March. This week, I’m lifting our Buy Below on Middleby to $85 per share.

  Moody’s (MCO) is another stock that’s been rallying very well for us. Shares of MOC are up close to 70% from its March low. The ratings agency had a blow-out earnings report for Q1. Moody’s earned $2.73 per share, which was 51 cents better than expectations. I’m raising our Buy Below on Moody’s to $290 per share.

  That’s all for now. The Federal Reserve meets again next week, on Tuesday and Wednesday. I don’t expect much action from the Fed this time, but it will be interesting to hear what the central bank has to say. This will be one of the meetings where the Fed will update its economic projections. Jerome Powell will hold a post-meeting press conference. Also on Wednesday, the government will release the CPI report for May. The last report showed deflation. 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: June 5, 2020
  Eddy Elfenbein, June 5th, 2020 at 7:01 am

  Unfazed By Pandemic, Bank of Japan to Keep Economic Recovery View

  ‘Europe Finally Got the Message’: Leaders Act Together on Stimulus

  ‘Intelligent Lockdown’ Worked Because the Dutch Follow Rules

  Futures Gain As Recovery Optimism Lingers Ahead Of May Jobs Data

  U.S. Unemployment Rate Seen Near 20% As COVID Slams Jobs Market Again In May

  Fed Vow Boosts Debt Binge While Borrowers Cut Thousands of Jobs

  Pompeo Calls Nasdaq’s Strict Rules A Model To Guard Against Fraudulent Chinese Companies

  Tenants’ Troubles Put Stress on Commercial Real Estate

  ‘How It’s Going …’ Goldman Executive’s Email On Racial Inequality In America

  For Some Minority-Owned Businesses, Their Lenders Are Now Their Defenders

  Brooks Bros., ‘Made in America’ Since 1818, May Soon Need a New Calling Card

  Joshua Brown: Commercial vs Household Bankruptcies in May 2020 & “We are overreacting because if it looks like you’re overreacting, you’re probably doing the right thing”

  Howard Lindzon: What.A.Rally.

  Ben Carlson: Massive Up and Down Moves in Stocks in the Same Year Are More Common Than You Think

  Michael Batnick: Animal Spirits: The Unluckiest Generation

  Be sure to follow me on Twitter.

• Jobless Claims = 1.877 million
  Eddy Elfenbein, June 4th, 2020 at 11:20 am

  Today’s jobless claims report came in at 1.877 million. That’s another decline, our ninth in a row, but it was worse than expectations.

  Economists surveyed by Dow Jones had been looking for 1.775 million new claims. The Labor Department’s total nevertheless represented a decline from the previous week’s upwardly revised total of 2.126 million. Filings under the Pandemic Unemployment Assistance program totaled 623,073.

  This was the first time the government’s weekly jobless claims report came under 2 million since the week ended March 14.

  “Even as states reopen, claims in the millions are an indicator that the economic pain of the COVID-19 crisis is still acute,” said Daniel Zhao, senior economist at job placement site Glassdoor.

  Tomorrow is the big May jobs report.

  Yesterday, the S&P 500 rose for the fourth day in a row and the seventh time in the last eight sessions. As I write this, the index is up by a tiny bit.

• Morning News: June 4, 2020
  Eddy Elfenbein, June 4th, 2020 at 7:05 am

  Rally Pauses Ahead of ECB Stimulus Plan

  Germany Finally Splurges, But Not Without Fresh Criticism

  China Steps Back in Airline Dispute With the Trump Administration

  Senate Approves More Time to Spend Paycheck Protection Loans

  U.S. Jobless Claims Understate Reality With Gaps in Federal Data

  America’s Safety Net Is Failing Its Workers

  401(k) Plans Move a Step Closer to Pooling With Private Equity

  Vanguard’s Eight-Year Quest to Crack $1 Trillion Market Drags On

  GM Plans Electric Van for Business Users In Bid to Pre-Empt Tesla

  GM CEO Mary Barra Expects North American Plants to Return to Near Pre-Coronavirus Levels By Late June

  AMC Theatres Has ‘Substantial Doubt’ It Can Reopen

  Former U.A.W. President Gary Jones Pleads Guilty

  Ben Carlson: Animal Spirits: The Unluckiest Generation

  Joshua Brown: Troy Prince Introduces Wall Street To Talent They Haven’t Discovered Yet

  Howard Lindzon: ‘If You Had Told Me’ … and Fashology Takes Flight

  Be sure to follow me on Twitter.