Archive for September, 2020

• The Morning After
  Eddy Elfenbein, September 30th, 2020 at 11:07 am

  The stock market is up nicely this morning after yesterday’s raucous debate. I don’t know if it’s a sign of where we are, but shares of Smith & Wesson were up as much as 2.3% today.

  Some econ news this morning.

  ADP’s payroll report said that 749,000 new private sector jobs were created last month. Wall Street had been expecting a gain of 600,000.

  The government releases its stats on Friday, The ADP report isn’t a terribly good indicator of what the government will say, but it’s been especially bad lately.

  However, during the coronavirus pandemic, ADP’s initial estimate has often trailed the official government count by a significant margin, indicating potential upside for the September count. The initial ADP estimate for August was just 428,000 but was revised upward to 481,000, still a good distance from the Labor Department tally.

  For September, ADP found that manufacturing added 130,000 jobs. The only sector to grow more was trade, transportation and utilities, which grew by 186,000.

  Leisure and hospitality, a sector especially hard hit during the pandemic, saw a gain of 92,000. Education and health services rose 90,000, though all the growth came on the health-care side as education lost 11,000.

  Also this morning, the second-quarter GDP figure was revised upward to -31.4%. That’s an annualized number. It’s odd that a number like that is an upward revision but the previous report was for -31.7%. Bear in mind that Q2 began six months ago and ended three months ago. At the end of October, we’ll get the first report on Q3 GDP growth.

  

  The Atlanta Fed’s GDPNow estimates Q3 GDP growth of 32%. Unfortunately, a 32% drop and a 32% gain doesn’t bring you back to even.

  The pending home sales report jumped 8.8% last month to reach an all-time high. The data goes back about 20 years. It’s no secret what the cause is—very low mortgage rates. Sales were up 24% over August last year.

  Buyers are running out of homes to buy. That’s putting the squeeze on inventory.

  Prices are mostly being fueled by an incredibly short supply of homes for sale. The inventory of homes for sale at the end of August was down 18.6% annually, putting the market at a 3.0 month-supply.

  “The increase in contract signings is shrinking the limited number of homes for sale to some of the lowest levels in recent history,” said George Ratiu, senior economist at realtor.com. “This is causing a massive imbalance to the market’s supply and demand, which is rewarding sellers with home price increases that more than double the pace of wages. Looking forward, with no signs of these dynamics shifting anytime soon, more price increases are likely on the way and affordability will likely continue to be a challenge for many buyers.”

• Morning News: September 30, 2020
  Eddy Elfenbein, September 30th, 2020 at 5:56 am

  First U.S. Presidential Debate Fails To Move Investors

  Here’s The Shocking Truth About Robinhood Investors Vs. Wall Street Stock Pros

  ‘Game Changing’ 15-Minute Covid-19 Test Cleared in Europe

  Disney to Lay Off About 28,000 Parks Unit Employees Due To Coronavirus Hit

  Seattle Passes Minimum Pay Rate for Uber and Lyft Drivers

  Pandemic Convinces Airline Workers It’s Time for New Horizons

  Banker Walks Free From Insider Trading Charge After Deleting WhatsApp

  Caesars to Buy British Bookmaker for $3.7 Billion

  Beyond Meat Plans To Triple Distribution At Walmart Amid Growing Demand

  The Picture of a Broken Tax System

  Nick Maggiulli: No, This Isn’t a Repeat of the Dot-Com Bubble

  Ben Carlson: The Coming Psychological Revolution in the Housing Market

  Michael Batnick: When Should I Use a Financial Advisor?

  Joshua Brown: Build Something Great And The World Will Find It & How To Make A Hundred Million Dollars For No Reason

  Howard Lindzon: Mulesoft Founder Ross Mason Joins Me On Panic With Friends And Explains The Software Revolution In Some Great New Ways

  Be sure to follow me on Twitter.

• Sherwin-Williams Raises Guidance
  Eddy Elfenbein, September 29th, 2020 at 4:28 pm

  Sherwin-Williams (SHW) raised its Q3 sales guidance, and it sales and income guidance for the full year. The company now sees Q3 sales rising by 3% to 5% over last year’s Q3. The previous guidance was for sales to be up or down by a “low-single-digit” percentage.

  For all of 2020, Sherwin sees sales “flat to up slightly” over last year. The previous guidance was for flat. For full-year earnings, Sherwin sees a range of $20.96 to $21.46 per share. The previous guidance was $19.21 to $20.71 per share. That includes $2.54 per share in an acquisition-related amortization expense.

  Earnings are due out on October 27.

• Biggest Jump in Consumer Confidence in 17 Years
  Eddy Elfenbein, September 29th, 2020 at 11:33 am

  This morning’s consumer confidence report showed the biggest gain in 17 years.

  The Conference Board’s index increased 15.5 points, the most since April 2003, to 101.8 from August’s upwardly revised 86.3, according to a report issued Tuesday. The median forecast in a Bloomberg survey of economists called for a reading of 90 in September, and the figure exceeded all estimates.

  The group’s gauge of current conditions rose 12.7 points to 98.5, while a measure of the short-term outlook jumped 17.4 points to a three-month high. The gain in the expectations index was the largest since 2009. The S&P 500 turned positive after the report.

  Despite the bullish report, it’s not carrying over into the stock market this morning. The S&P 500 is down a bit which halts a brief rally which started with last Thursday’s turnaround.

  Once again, financial and energy stocks are down the most. This is an unusual day because Growth is beating Value on a down day even though Low Vol is beating High Beta. That’s the sign that banks or energy stocks are weighing down the market. Today, it’s both.

  The month and quarter come to a close tomorrow. With that, we get the ADP jobs report tomorrow and the big jobs report on Friday.

• Morning News: September 29, 2020
  Eddy Elfenbein, September 29th, 2020 at 7:01 am

  High Debt. Low Growth. Are We All Japanese Now?

  Low Interest Rates Are Worsening Retirement Prospects Worldwide

  How Coal-Loving Australia Became the Leader in Rooftop Solar

  Japan’s NTT Launches $40 Billion Buyout Of Wireless Unit Docomo

  Walmart In Talks For Up to $25 Billion Investment In Tata’s ‘Super App’

  They’re Shorting Market Freedom at the SEC

  Apple and Epic Games Spar Over Returning Fortnite to the App Store

  Target Muscles In On Amazon’s Prime Day — Again

  The Fall Was ‘Black Friday’ for America’s College Football Towns

  Whole Foods CEO Says Amazon Merger Enabled Long-Term Thinking

  Verizon Scrambling to Unload HuffPost As Losses Mount

  Prosecutors Target Ex-Audi Chief in First VW Emissions Trial

  Ben Carlson: Is Exxon the Next General Electric?

  Michael Batnick: When Should I Use a Financial Advisor?

  Howard Lindzon: Momentum Monday – The Sun Is Shining and Social Distance Themes Are Working

  Be sure to follow me on Twitter.

• The Decline and Fall of the Energy Sector
  Eddy Elfenbein, September 28th, 2020 at 10:16 am

  The stock market is up again today. This builds upon Friday’s gain and Thursday’s turnaround. The index is close to retaking its 50-day moving average. The current 50-DMA is 3,353.23. This morning, the S&P 500 has been as high as 3,350.14.

  The decline of energy has been stunning. Here’s the S&P 500 Energy Index divided by the S&P 500. It hasn’t found a bottom.

  

  If I stopped this chart in, say, 2017, then Energy would appear to be cheap.
  But if someone had been waiting for this to “revert to the mean,” they would have gotten crushed.

  Here’s the same chart, but the line is in red and it’s overlaid with the price of oil.

  

• Morning News: September 28, 2020
  Eddy Elfenbein, September 28th, 2020 at 7:07 am

  What Economies Can Learn From Sweden’s Lockdown Lite

  From Cars to Jewelry, China’s Shoppers Are Spending Again

  Pasta, Wine and Inflatable Pools: How Amazon Conquered Italy in the Pandemic

  U.S. Judge Blocks Trump Administration’s Ban On New TikTok Downloads & Larry Ellison’s On-Off TikTok Deal Is A Three-Ring Circus

  The Key Takeaways From the Times’ Trump Tax-Return Investigation

  Christmas Shopping Poised to Show Inequity in K-Shaped Recovery & Amazon’s Prime Day Kicks Off On October 13th

  Uber Can Continue Operating in London, Judge Rules

  Investors Swamp IPO for K-Pop Band BTS Management Label, Prices At Top of Range

  Cleveland-Cliffs to Buy ArcelorMittal USA for $1.4 Billion

  Trump Wants to Discredit the Election. This Nerd Could Stop Him.

  Jeff Miller: Weighing the Week Ahead: What Did We Know — And When Did We Know It?

  Howard Lindzon: The State of Gen Z…This Generation Can Make You Money

  Ben Carlson: Anchoring & Adjustment in the Stock Market

  Michael Batnick: Animal Spirits: Investing in Gold & Compounding is Overrated

  Be sure to follow me on Twitter.

• CWS Market Review – September 25, 2020
  Eddy Elfenbein, September 25th, 2020 at 7:08 am

  “A lot of people with high IQs are terrible investors because they’ve got terrible temperaments.” – Charlie Munger

  In last week’s issue, I mentioned that the S&P 500 was getting close to falling below its 50-day moving average. That’s one of these oddball technical indicators that’s important because everyone else thinks it’s important.

  Sure enough, on Friday, the index closed below its 50-DMA for the first time since April, and that gave more confidence to the bears. The S&P 500 continued its slide, and at one point on Thursday, the index was down for the year.

  

  Since the all-time high reached on September 2, the market has lost 9.3%. We’re getting close to a 10% drawdown, which is the traditional definition of a market correction.

  We’ve also seen more of the trend I’ve discussed recently, namely value stocks outperforming growth stocks. In fact, the S&P 500 Growth Index is already in correction territory. Since September 2, Growth is down 10.83%, whereas Value is off by 6.91%.

  Our Buy List continues to hold up well. This week, we got a blowout earnings report from FactSet. The financial-data company beat Wall Street’s earnings forecast by more than 13%. FDS also offered an upbeat forecast for the year ahead. We now have a 25% YTD gain in FactSet. I’ll have more details in just a bit.

  Before I get to that, I want to discuss the upcoming Q3 earnings season. Many companies are still in rough shape. However, for the first time in a long while, earnings estimates are actually increasing.

  Third-Quarter Earnings Season Preview

  September comes to a close next week, and with it, the third quarter of 2020. By the middle of October, firms will start releasing their Q3 earnings reports. This will be a crucial earnings season for Wall Street and for us.

  Here’s a chart showing the S&P 500 in black, with trailing operating earnings in blue. The future part of the earnings line is obviously based on expectations. Trailing earnings are expected to trough in Q4. The two lines are scaled at a ratio of 18 to 1.

  

  The bad news is that this will be another tough earnings season due to the widespread dislocations caused by Covid-19. The good news is that we’ve gradually improved from the dire numbers we saw earlier this year. For Q1, earnings plunged 49% from Q1 of 2019. For Q2, earnings were down 33%.

  Now analysts are “only” expecting a decline of 19%. That estimate has actually increased somewhat in recent weeks. At the middle of the year, Wall Street had been expecting Q3 earnings of $30.89 per share for the S&P 500 (that’s the index-adjusted number). Now the estimate is up to $32.05 per share. (Every point in the S&P 500 is worth around $8.27 billion.)

  Earnings are expected to fall another 9% for Q4. After that, earnings are expecting to snap back briskly in 2021. That’s why the price/earnings ratio, based on trailing earnings, appears to be stretched. That’s a glitch of using the P/E ratio: earnings look backward but prices look forward.

  For all of this year, earnings are expected to be $113.84 per share. By today’s price, that gives the S&P 500 a lofty P/E ratio of 29. However, Wall Street expects full-year 2021 earnings of $164.04 per share. That assumes earnings growth of 45% for next year. Going by that figure, that gives the S&P 500 a forward P/E ratio of 20.

  Here’s the expected earnings growth rate for the 11 sectors that comprise the S&P 500:

  Healthcare 23.81%
  Tech 9.77%
  Utilities -1.19%
  Consumer Staples -1.68%
  Communication -9.95%
  Materials -12.56%
  Financials -34.55%
  Consumer Discretionary -37.20%
  Real Estate -50.29%
  Industrials -60.10%
  Energy -108.27%

  Why Dividends Matter

  In recent issues, I’ve discussed what the Federal Reserve’s new willingness to tolerate some inflation means for us. My view is that this is good for stocks with attractive dividend yields.

  I often think investors don’t fully appreciate the importance of dividends. I recently posted what I called a very “underrated chart” to Twitter. This is the S&P 500 Total Return Index divided by the S&P 500.

  

  Some of the responders weren’t terribly impressed. To generalize, they said, “so what, it’s a line growing at 2%. Big deal.”

  But in my view, it’s a very big deal, and it underscores the importance of dividends.

  Allow me to explain. First, note how stable the line is and how it rises consistently. As an investor, that’s nice to see.

  Technically, the chart shows us the return from dividends for investing in the S&P 500 since the beginning of 1990. It’s not just the dividend yield. It’s the return from dividends. That means it’s the dividend yield, plus the growth provided by dividends. That’s a key factor.

  Think of it this way. Imagine a stock with a 1% dividend yield. For the next several years, the stock and the dividend both grow by 15%. What’s the result? The dividend yield will stay at 1%, but you’ve actually made a ton of money from those dividends.

  There’s also the multiplier effect. Over the last 30 years, the return from dividends has been 91.58%. But getting dividends from the S&P 500 hasn’t added 91% to your total return. Not even close.

  Instead, it turns an 835% gain into a 1,693% gain. It adds hundreds of percentage points to your totals—and that extra amount balloons higher each year. Dividends are small and easy to overlook, but they make a big difference.

  On our Buy List, some of the higher-yielding stocks include AFLAC (AFL), Eagle Bancorp (EGBN) and Hershey (HSY). Now let’s look at our most recent Buy List earnings report.

  FactSet’s Blow-Out Earnings Report

  We had one Buy List earnings report this week, which was from FactSet (FDS). On Thursday, FDS reported very strong earnings of $2.88 per share. That was well above Wall Street’s forecast of $2.54 per share.

  First, some background. This was for the fourth quarter of FactSet’s fiscal year, which ended in August. At the time of the last earnings report, the company raised its full-year earnings range to between $10.40 and $10.60 per share. That was an increase of 55 cents per share to both ends of the range. Since FactSet had already made $7.99 per share through the first three quarters, that implied a Q4 range of $2.41 to $2.61 per share.

  “We executed well on our second-half pipeline to end our fiscal year in a strong position,” said Phil Snow, FactSet CEO. “I am proud of our team’s performance and remain confident in our investment plan. Our programs in content and technology are expanding the universe of knowledge our clients trust and meeting demand for the workforce of the future.”

  For the quarter, FactSet’s organic revenue grew by 4.9% to $383.4 million. A key stat for the company is its Annual Subscription Value, or ASV. At the end of the quarter, their ASV stood at $1.56 billion. The organic growth rate was 5.3%. The annual retention rate is 95%.

  This was FactSet’s 39th year in a row of revenue growth, and it looks like they’ll see #40. Client count is up to 5,875, and user count reached 133,051. The company now has 10,484 employees. That’s an increase of 8.3% in the last year.

  For the year, FactSet’s earnings rose by 8.7% to $10.87 per share. This is the 24th year in a row that FactSet has grown its earnings.

  During Q4, FactSet bought back 81,948 shares for $28.6 million. That’s an average price of $349.25 per share. In March, the company approved an increase to its share-repurchase program of $220 million. There’s now $259 million available to buy more shares.

  Now let’s look at guidance. For the new fiscal year, FactSet expects earnings between $10.75 and $11.15 per share. Wall Street had been expecting $10.84 per share. The company sees operating margin ranging between 32% and 33%. That’s very good.

  This is an outstanding report. Shares of FDS jumped as much as 8% on Thursday before giving back a lot of that gain. FactSet remains a very good buy up to $360 per share. In 24 years, the stock has returned 8,881%.

  

  Our next earnings report will be from RPM International (RPM) on October 7. I’ll preview that report in next week’s issue. After that, we won’t get any earnings reports until about October 20, during the Q3 earnings season.

  That’s all for now. With the end of the month, we’ll get some important turn-of-the-month economic reports next week. On Wednesday, ADP will release its payroll report. We’ll also get another revision to Q2 GDP. On Thursday, the ISM Manufacturing report comes out, along with another initial-jobless-claims report. Then on Friday, the big September jobs report comes out. 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. Our ETF, the AdvisorShares Focused Equity ETF (CWS), just turned four years old. The ETF is a cheap-and-easy way to invest in our Buy List. To buy one share of each of the stocks on the Buy List would cost you over $3,700, but the ETF lets you own all 25 in a convenient package. For more info, check out our website.

• Morning News: September 25, 2020
  Eddy Elfenbein, September 25th, 2020 at 7:02 am

  EU’s Vestager Appeals Court Veto of $15 Billion Apple Tax Order

  U.S. Imports Surge As Pandemic Worries Have Retailers Stockpiling

  Why the U.S. Risks Repeating 2009’s Economic Stimulus Mistakes

  The Stock Market’s Momentum Has Turned Negative

  Why Stock-Market Investors Are Starting to Freak Out About the 2020 Election

  Job Rebound Is ‘Losing Steam’ as Crisis Passes Six-Month Mark

  Nuclear Power Wants to Hitch Its Fortune to the Hottest New Fuel

  Citigroup Says Racism Has Cost US Economy $16 Trillion

  Amazon Unveils Drone That Films Inside Your Home. What Could Go Wrong?

  Costco’s Sales Get Another Boost From Pandemic

  How an Amazon Bribery Scheme Became a $100 Million Swindle

  Joshua Brown: The Suburban Housing Boom is Just Getting Started

  Michael Batnick: How Much Money Should You Have Saved For Retirement?

  Ben Carlson: Two Big Trends I’m Thinking About For the Future

  Howard Lindzon: Benchmark Capital’s Chetan Puttagunta Joins Me On Panic With Friends – As Software Eats The World – How Hungry Is Open Source?

  Be sure to follow me on Twitter.

• New-Homes Sales Top One Million
  Eddy Elfenbein, September 24th, 2020 at 11:23 am

  From CNBC:

  Sales of new U.S. single-family homes increased to their highest level in nearly 14 years in August, suggesting the housing market continued to gain momentum even as the economy’s recovery from the COVID-19 recession appears to be slowing.

  The Commerce Department said on Thursday new home sales rose 4.8% to a seasonally adjusted annual rate of 1.011 million units last month, the highest level since September 2006. New home sales are counted at the signing of a contract, making them a leading housing market indicator.

  July’s sales pace was revised upward to 965,000 units from the previously reported 901,000 units.

  Economists polled by Reuters had forecast new home sales, which account for more than 10% of housing market sales, slipping 1% to a rate of 895,000-units.