Archive for August, 2020

• Best August Since 1984
  Eddy Elfenbein, August 31st, 2020 at 10:39 am

  The stock market is down slightly as I write this, although the Nasdaq is up. This looks to be the best August for the S&P 500 since 1984.

  Over the last century, as well as 50 years and 20 years, September is the worst month in stock market history.

  But look at what comes after September, the best quarter of the year, by far. In the last 20 years – which includes the terrible fourth quarters of 2008 and 2018 – fourth quarters have surpassed the previous three quarters combined.

  In other news, TikTok said it may announce a deal today to sell its U.S. business. The deal could fetch $20 billion to $30 billion. Microsoft is thought to be a top bidder.

  AT&T said it’s looking to sell its DirecTV unit. Five years ago, they paid $49 billion for it. Let’s just say that it will sell for less. Much less.

• Morning News: August 31, 2020
  Eddy Elfenbein, August 31st, 2020 at 7:00 am

  As Japan’s Abe Leaves, ‘Abenomics’ Will Remain, for Good or Ill

  Buffett’s Berkshire Wagers $6 Billion on Japan Trading Firms

  Kashkari Says There’s No Urgency for Fed to Update Rate Guidance

  Steven Mnuchin Tried to Save the Economy. Not Even His Family Is Happy.

  Staying Afloat: A Pandemic Financial Guide for Millennials

  China Throws a Wrench Into Trump’s Plan to Force TikTok Sale

  N.B.A. Brings Flash to E-Sports, but Can It Hold On to Its Viewers?

  U.S. Scraps Philips Ventilator Order In 2020 Earnings Blow

  Roger Nusbaum: A Great Year To Test Alternative Strategies

  Cullen Roche: Three Things I Think I Think – Lumbering Along

  Joshua Brown: Six Lessons from Pandemic Summer

  Jeff Miller: Weighing the Week Ahead: Risky Business or Business as Usual?

  Howard Lindzon: You Gotta Have Faith?

  Ben Carlson: Bull Case/Bear Case & The Case For a Post-Covid Spending Boom

  Michael Batnick: Animal Spirits: Sectors & The Business Cycle & The Way Things Were

  Be sure to follow me on Twitter.

• Happy 90th Birthday, Warren Buffett
  Eddy Elfenbein, August 30th, 2020 at 8:10 am

  Warren Buffett turns 90 years old today. When he was born, Nebraska had only been a state for 63 years.

  The stock market was closed on August 30, 1930, but the day before, the Dow closed at 240.42. Still, that was down a lot from its big peak of less than one year before.

  It took 90 years for the Dow to rise 119-fold.

• CWS Market Review – August 28, 2020
  Eddy Elfenbein, August 28th, 2020 at 7:08 am

  “There is a danger of expecting the results of the future to be predicted from the past.” – John Maynard Keynes

  On Thursday, the stock market closed higher for the sixth day in a row, and it was the fifth all-time high close in a row. This has been an incredible run for the stock market. Over the last two months, the S&P 500 has gained nearly 16%.

  

  This is quickly becoming the Honey Badger market—it simply doesn’t care about anything. Lockdowns, no problem. Social unrest, who cares? Mass unemployment, hold my beer. No matter what comes our way, the market just keeps going and going.

  In this week’s issue, I want to discuss a recent speech by Federal Reserve Poobah Jerome Powell. Normally, I try not to pay too much attention to what the Fed says, but this time, it’s worth some closer inspection. I’ll break it all down for you.

  We also had a good earnings report from Hormel Foods. The Spam folks beat expectations. I’ll have a summary. I also have some new Buy Below prices for you.

  The Fed Ditches Its 2% Inflation Target

  The Federal Reserve is holding its annual shindig in Jackson Hole, Wyoming. This event is sponsored by the Kansas City Fed, and it’s notable because the Fed has historically used the late-summer conference to announce important policy changes.

  The theme this year is “Navigating the Decade Ahead: Implications for Monetary Policy.” I know, it sounds kind of dry, but this year’s conference is worth some attention. More specifically, I’m referring to Powell’s speech on Thursday, which was entitled “New Economic Challenges and the Fed’s Monetary Policy Review.”

  Let me pause for a moment to warn you that central bankers are bred to speak in convoluted jargon. Some of this is by design. It’s a nice advantage to have when no one understands what the heck you’re talking about. Former Fed Chairman Alan Greenspan once said, “If I’ve made myself too clear, you must have misunderstood me.”

  Fortunately, your humble newsletter writer is well versed in the arcane dialect of Fedspeak, so I can translate it for you. In his remarks, Powell said that the Fed will shift its emphasis when deciding to adjust interest rates. Previously, the Fed stressed the need to raise interest rates early in an effort to combat inflation. The feeling was that inflation needed to be fought before it showed up.

  Powell now says that’s no longer needed. The battle against inflation is over. Just looking at recent history, the threats to the U.S. economy have been a pandemic and a financial crisis. For the most part, inflation has been safely bottled up. With this, the Fed is ditching its 2% inflation target.

  In 2012, the Federal Reserve adopted a policy of targeting inflation at 2%. They weren’t alone. Many central banks around the world adopted similar policies. The benefit of targeting inflation is that it gave the public a clear view of what the Fed was trying to do. With this, the Fed got better (much better) at communication, and the Fed also has improved its transparency.

  The Fed has undershot 2% inflation so consistently that no one bats an eye anymore. At root, Powell is officially adopting a policy that’s already existed. The Fed’s just admitting it. Powell cited four major changes in the Fed’s understanding of the economy. One is that normal economic growth is now assumed to be much less than what it had been. During latter third of the 20th century, the U.S. economy routinely grew by 3% per year in real terms. Not anymore. Now we’re lucky if we can get 2%.

  The Fed also assumes that interest rates now need to be much lower than they have been. Under the old playbook, during an expansion, the Fed would raise interest rates to 2% or 3% above inflation. During a recession, it would cut rates to about the level of inflation. That hasn’t been the case in over 10 years.

  Here’s a look at real short-term interest rates. Notice how much lower they are than in years past.

  

  Economists speak of the natural rate of inflation. This is the rate at which everything comes into balance. No one knows exactly what the natural rate is, but it’s widely understood that whatever it is, it’s much lower than where it used to be.

  Powell also noted that before Covid-19, the labor market was doing quite well. The unemployment rate dropped to a 50-year low. Even when the labor-force participation rate started to rise, it did absolutely nothing to spark inflation. How times have changed. In the 1980s, bond investors would have totally freaked out.

  One problem with lower inflation is that the Fed has had less room to boost the economy with rate cuts. That explains why the Fed has embarked on some non-traditional policies.

  To be blunt, the Fed needs some inflation. Powell said:

  “Our new statement indicates that we will seek to achieve inflation that averages 2 percent over time. Therefore, following periods when inflation has been running below 2 percent, appropriate monetary policy will likely aim to achieve inflation moderately above 2 percent for some time.”

  To be clear, the Fed wants inflation to average 2%, but it’s not going to worry if it rises above 2%.

  What does this mean for us? It’s good news. For one, I don’t like to see central bankers wedded to outmoded ways of thinking. Theories should fit the facts, not the other way around.

  It’s also good to keep interest rates low. The Fed has killed many stock rallies with overly aggressive rate hikes.

  Most importantly, stocks have performed well under modest inflation. I’ve run the numbers and found that inflation doesn’t became a problem for stocks until it hits 5.7%, and we’re a long way from there.

  The story out of Jackson Hole simply confirms what we all knew. The Fed was never going to sacrifice the health of the U.S. economy in order to preserve some random inflation target.

  Now let’s look at our one Buy List earnings report from this week.

  Hormel Foods Beats Earnings

  On Tuesday, Hormel Foods (HRL) reported fiscal Q3 earnings of 37 cents per share. That beat Wall Street’s estimate of 34 cents per share. This was for the quarter that ended on July 31.

  Looking at the numbers, this was a solid quarter for Hormel. Overall sales rose 4% to $2.4 billion. Sales volume also rose by 4%. That’s important, because you don’t want to rely overly on price increases. Hormel’s operating free-cash flow rose 72% to $242 million. That’s a good sign.

  “We had an excellent third quarter with strength across our retail and deli businesses, along with a rebound in our foodservice business,” said Jim Snee, chairman of the board, president and chief executive officer. “The intentional balance we have built across our portfolio has once again enabled us to generate stable cash flows in a very dynamic time period, even as we absorbed significant incremental costs in our supply chain due to the COVID-19 pandemic.”

  Here’s how the quarter broke down by Hormel’s different business units:

  Refrigerated Foods
  Volume up 8%; organic volume up 7%
  Net sales up 5%; organic net sales up 2%
  Segment profit down 11%

  Grocery Products
  Volume up 6%
  Net sales up 7%
  Segment profit up 36%

  Jennie-O Turkey Store
  Volume down 9%
  Net sales down 4%
  Segment profit down 67%

  International & Other
  Volume down 5%
  Net sales up 2%
  Segment profit up 26%

  I also like that Hormel has a solid balance sheet. Its cash on hand is now $1.7 billion. That’s up from $0.7 billion a year ago. The big gain is due to the bond offering and also halting share buybacks. Total debt is up to $1.3 billion from $0.3 billion a year ago.

  For Hormel’s outlook, Snee said he expects to see the current quarter mirror the strength of Q3, but he was cautious to add that it’s an uncertain environment. He also said he expects the food service to post a year-over-year decrease for Q4.

  HRL pulled back, but that’s after a pretty nice run. Hormel remains a buy up to $53 per share.

  That’s it for our Buy List earnings report. The next stock to report is FactSet (FDS), and it won’t report until September 24. RPM International (RPM) will probably report in early October. Things won’t get busy again until the Q3 earning season heats up in mid-October. Now let’s look at some updates to our Buy Below prices.

  Buy List Updates

  Shares of Ansys (ANSS) got to another new high on Thursday. We now have a 29.1% gain in ANSS this year. This week, I’m raising our Buy Below on Ansys to $340 per share.

  

  Shares of Globe Life (GL) have been trending higher recently. The insurance company recently resumed its share repurchases. GL’s last earnings report was pretty good, and the stock is only going for about 12 times estimates earnings. I’m raising my Buy Below on Globe Life to $90 per share.

  I covered the recent earnings report from Ross Stores (ROST) in last week’s issue. The deep-discounter surprised us by reporting a small profit. Ross was widely expected to report a loss. I held off on changing our Buy Below price. Now that I’ve had more time to consider it, I’m going to lift our Buy Below on Ross Stores to $98 per share.

  That’s all for now. There are some important economic reports due out next week. On Tuesday, the ISM Manufacturing Index comes out. It will be interesting to see if the economy is still rebounding. On Wednesday, the ADP releases its payroll report. On Thursday, we’ll get to see another initial-jobless-claims report. Then on Friday, the August jobs report comes out. For July, the unemployment rate was 10.2%. 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

  P.S. Please join me for a webinar this Tuesday, September 1 at 4 p.m. ET. Noah Hamman, the CEO of AdvisorShares, will be joining me. Noah is an expert on all things ETF. You can register here.

• Morning News: August 27, 2020
  Eddy Elfenbein, August 27th, 2020 at 7:02 am

  U.K. to Pay People on Low Incomes If Self-Isolating in Pandemic

  Japan Raises View on Exports, But Says Economic Situation Still Severe

  Jackson Hole’s Greatest Hits Keep Focus on Fed’s Annual Retreat

  Powell Expected To Begin Laying Out Fed’s New Monetary Policy Approach

  TikTok CEO Mayer Quits After Three Months, Just As Firm Challenges U.S. Ban

  The Lesson We’re Learning From TikTok? It’s All About Our Data

  Amazon’s Latest Grocery Store Concept Opens, With High-Tech Carts

  Retail Bankruptcies Will Push Mid-Range Malls Over the Edge

  The Pandemic Is Supercharging the Wildly Profitable Video Game Business

  Soon, the Kitty Litter Will Arrive By Electric Truck

  China’s Biggest Carmaker Posts 39% Drop in First-Half Profit

  Covid Gag Rules at U.S. Companies Are Putting Everyone at Risk

  Jeff Bezos Becomes The First Person Ever Worth $200 Billion

  Michael Batnick: Modern Market Cap Theory

  Ben Carlson: Animal Spirits: Trickle Up Economics

  Howard Lindzon: SPAC SPAC SPAC – Supply is Coming

  Be sure to follow me on Twitter.

• Morning News: August 26, 2020
  Eddy Elfenbein, August 26th, 2020 at 7:03 am

  Boom or Bust? Welcome to the Freewheeling World of Crypto Lending

  How the U.K. Restarted Its Restaurant Industry: Paying Half the Bill

  Framework Review Complete, Fed’s Powell Starts Hard Sell for Higher Inflation

  Fed Seen Holding Rates At Zero For Five Years

  U.S. to Spend $625 Million In Five Quantum Information Research Hubs

  Airline Job Cuts Could Pressure Congress and Trump on Stimulus

  How TikTok’s Talks With Microsoft Turned Into a Soap Opera

  China Still Buying $300 Billion of Chips From U.S., Elsewhere

  What’s a Palantir? The Tech Industry’s Next Big I.P.O.

  The U.S. Narcotics Crisis Is Made in Mexico With American Raw Materials

  How the Sacklers Shifted $10.8 Billion of Their Opioid Fortune

  Nick Maggiulli: In the Eye of the Beholder

  Ben Carlson: Risk and Return in the Stock Market Are Not Evenly Distributed

  Michael Batnick: Generational Buying Opportunity

  Joshua Brown: The Vaccine Trade: What Are Your Thoughts?

  Be sure to follow me on Twitter.

• Hormel Foods Beats Estimates by Three Cents
  Eddy Elfenbein, August 25th, 2020 at 8:30 am

  This morning, Hormel Foods (HRL) reported fiscal Q3 earnings of 37 cents per share. That beat Wall Street’s estimate of 34 cents per share. This was for the quarter that ended on July 31.

  Looking at the numbers, this was a solid quarter for the Spam folks. Overall sales rose 4% to $2.4 billion. Sales volume also rose by 4%. That’s important because you don’t want to rely on price increases. Hormel’s operating free cash flow rose 72% to $242 million. That’s a good sign.

  CEO Jim Snee said:

  “We had an excellent third quarter with strength across our retail and deli businesses, along with a rebound in our foodservice business,” said Jim Snee , chairman of the board, president and chief executive officer. “The intentional balance we have built across our portfolio has once again enabled us to generate stable cash flows in a very dynamic time period, even as we absorbed significant incremental costs in our supply chain due to the COVID-19 pandemic.”

  Here’s how the quarter broke down by Hormel’s different business units:

  Refrigerated Foods
  Volume up 8%; organic volume up 7%
  Net sales up 5%; organic net sales up 2%
  Segment profit down 11%

  Grocery Products
  Volume up 6%
  Net sales up 7%
  Segment profit up 36%

  Jennie-O Turkey Store
  Volume down 9%
  Net sales down 4%
  Segment profit down 67%

  International & Other
  Volume down 5%
  Net sales up 2%
  Segment profit up 26%

  Hormel still has a solid balance sheet. Their cash on hand is up to $1.7 billion. That’s up from $0.7 billion a year ago. That’s due to the bond offering and also halting share buybacks. Total debt is up to $1.3 billion from $0.3 billion a year ago.

  For Hormel’s outlook, Snee said he expects to see the current quarter mirror the strength of Q3, but he was cautious to add that it’s an uncertain environment. He also said he expects to food service post a year-over-year decrease for Q4.

  The stock is down today but that’s after a pretty nice run.

  

• Morning News: August 25, 2020
  Eddy Elfenbein, August 25th, 2020 at 7:04 am

  Pandemic May Fire Up Japan’s Inflation, Doing What Cenbank Could Not, Economist Says

  With Hacks and Cameras, Beijing’s Electronic Dragnet Closes on Hong Kong

  Tech War Chronicles: How A Silicon Valley Chip Pioneer Landed In China

  Jack Ma’s Ant Group Files for IPO in Hong Kong and Shanghai

  As Uncertainty Threatens U.S. Growth, Fed Seeks More Firepower

  Why Trump’s Approval Ratings on the Economy Remain Durable

  The Great Inflation Debate Is Heating Up With Trillions at Stake

  Dow Kicks Out Exxon in Biggest Shake-Up Since 2013

  Salesforce to Join Dow Jones Industrial Average

  Citigroup Cites $900 Million Human Error. Lenders Are Puzzled

  Why TikTok Will Lose

  Ben Carlson: What Happened to the Middle Class?

  Michael Batnick: King Apple

  Roger Nusbaum: The 4% Rule Is Dead…continued

  Howard Lindzon: How To Do Business Development Right

  Joshua Brown: Jerry Seinfeld Plays Right Into James Altucher’s Hands

  Be sure to follow me on Twitter.

• The Highest P/E Ratio in 18 Years
  Eddy Elfenbein, August 24th, 2020 at 2:39 pm

  In today’s Wall Street Journal, Paul Vigna has an article noting the very high valuations for the stock market.

  The price/earnings ratio on the S&P 500, measured against the past 12 months of earnings, stands at 25.26, according to FactSet. That is the highest level since 2002. The forward P/E, measured against earnings expectations for the next year, is at 25.98—a mark last hit in September 2000.

  And the valuation of the median stock in the S&P 500, measured by forward P/E, is now in the 100th percentile of historical levels, according to Goldman Sachs Group Inc., going back four decades—the highest level possible. The index itself is trading at the 98th percentile.

  The problem when applying valuation metrics to the broader market is that markets can be overvalued or undervalued for years.

  Another issue, and one that is rarely addressed, is that valuations do change. For example, stocks today have higher valuations than they did before 1960. If you had followed the pre-1960 rules, you would have concluded that the market was consistently overvalued.

  The elevated P/E Ratio is noteworthy but it shouldn’t scare anyone out of the market.

  

• Morning News: August 24, 2020
  Eddy Elfenbein, August 24th, 2020 at 7:04 am

  Global Companies Raise Most Funds for the Month of August in a Decade

  Foxconn, Other Asian Firms Consider Mexico Factories As China Risks Grow

  Europe Tried to Limit Mass Layoffs, but the Cuts Are Coming Anyway

  Peter Thiel-Backed Startup Luminar to Go Public in $3.4 Billion Merger

  Tencent Gains $37 Billion After U.S. Reassures on WeChat Ban

  Electric Vehicle Makers Find a Back Door to Wall Street

  ‘The Big Short 2.0’: How Hedge Funds Profited Off the Pain of Malls

  America’s College Towns Are Facing an Economic Reckoning

  Prices Rise for NY Apartments With a Must-Have Feature

  Takeda to Sell Japan Consumer Health Unit Valued At $2.3 Billion to Blackstone

  Lawrence Hamtil: Three Industries With Durable Moats

  Roger Nusbaum: What Have You Learned, How Have You Adapted?

  Howard Lindzon: The Startup Community Way – Brad Feld Joins Me on Panic With Friends

  Joshua Brown: The Comeback on Main Street

  Michael Batnick: Animal Spirits: How to Spend Your Money

  Ben Carlson: Has the Market Changed at All Since the Bottom?

  Be sure to follow me on Twitter.