Archive for June, 2021

• ADP Jobs Report = 692,000
  Eddy Elfenbein, June 30th, 2021 at 12:28 pm

  This morning we got the ADP private payroll report. According to ADP, the U.S. economy created 692,000 private sector jobs last month. That’s a big number. Wall Street had been expecting 600,000.

  From an industry standpoint, the biggest hiring gain came from the 332,000 pickup in leisure and hospitality. The sector, which includes bars, restaurants, hotels and other related businesses, took the hardest hit from the Covid-19 pandemic but has shown strong gains during the economic reopening.

  Education and health services also indicated strong gains, increasing by 123,000, while trade, transportation and utilities rose by 62,000 and professional and business services saw 53,000 hires.

  On the goods-producing side, construction payrolls increased by 47,000 while manufacturing was up 19,000.

  Overall, services provided the bulk of the job gains with 624,000, while goods producers added 68,000.

  The official jobs report from the government is due out on Friday. I should caution you that the ADP report is not always a good predictor of what the government report will say. The consensus is for the government report to say that 675,000 jobs were created in June.

  Here’s a chart with the ADP data in red and the government in black:

  

  Tomorrow we’ll get the ISM Manufacturing report along with the jobless claims report.

• Bloomberg on Danaher
  Eddy Elfenbein, June 30th, 2021 at 11:42 am

  As many of you know, I’m a big fan of Danaher. The company is quiet and prefers to stay out of the limelight. At Bloomberg, Devon Pendleton and Tom Maloney discuss the Rales brothers’ charitable donations.

  Steven and Mitchell formed Danaher in the early 1980s, converting a real estate investment trust into a shell for scooping up struggling, little-known manufacturing businesses.

  They were among the first in North America to adopt the Japanese management philosophy of kaizen, which emphasizes efficiency and continuous improvement.

  That’s led to a shift in focus to life sciences, illustrated by Danaher’s acquisition last year of the biopharma unit of General Electric Co., whose chief executive officer, Larry Culp, previously headed Danaher for 14 years.

  The kaizen-inspired operating system has been credited for the company’s consistent returns. Its stock has outperformed Warren Buffett’s Berkshire Hathaway Inc. by almost 7% over the past 30 years.

  Along with efficiency, another of the brothers’ hallmarks is a reliance on credit. The Rales built up Danaher through a slew of debt-financed takeovers, leading Forbes to dub them “raiders in short pants” in a 1985 profile.

  

• Morning News: June 30, 2021
  Eddy Elfenbein, June 30th, 2021 at 7:07 am

  Global Regulators Try Again to Eliminate Money-Market Hazards

  Treasury Yields Signal Investors’ Waning Economic Exuberance

  Fed Unity Cracks as Inflation Rises and Officials Debate Future

  Congress Faces Renewed Pressure to ‘Modernize Our Antitrust Laws’

  CFPB Beefs Up Protections for Struggling Homeowners, But Will Not Ban Foreclosures

  Solar Stocks Rally To Two-Month High As Restriction Fears Ease

  Why Cathie Wood’s Ark Invest is Launching a Bitcoin ETF

  China’s Didi Raises $4.4 Billion in Upsized U.S. IPO

  Deutsche Bank’s License to Sponsor Hong Kong IPOs Suspended

  Husband-and-Wife Team Worth $2.2 Billion After Bubble Tea IPO

  Tech Company 2U Will Pay $800 Million to Buy EdX, Online Education Platform MIT and Harvard Created

  Facebook Unveils ‘Bulletin,’ A Newsletter Subscription Service

  Berkshire’s Munger Says China Right to Clip Ma’s Wings

  Americans Lost $29.8 Billion to Phone Scams over Past Year, Tripled from 2019

  The Fall of the Billionaire Gucci Master

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• CWS Market Review – June 29, 2021
  Eddy Elfenbein, June 29th, 2021 at 8:04 pm

  This is the free version of CWS Market Review. If you have a chance, please sign up for the premium newsletter for $20 per month or $200 for the whole year.

  The premium version contains more detailed analysis and I cover our Buy List stocks in greater depth.

  One more thing. I’ve added a new special report that’s only for premium subscribers, “How Not to Get Screwed on Your Mortgage.” This is a great report and it has my five pointers on never getting taken advantage of. Join us today! Now, let’s look at this amazing market.

  The S&P 500 closed a little bit higher today marking its 33rd new high of the year. That’s about one in every four trading days this year. Since its low 15 months ago, the stock market has nearly doubled. Charlie Bilello, one of my favorite market stats guys, notes that going back to the beginning of 2013, the index has now made 309 new all-time highs.

  

  I used to call this the Honey Badger market for its ability not to care. Now I may call it the Rita Coolidge market. Nothing but all-time highs.

  How much further can it run? Eh, that’s hard to say but there’s no obvious reason we’re due for a plunge. Tomorrow is the final trading day of Q2 and the first half of 2021. So far, it’s been a great year for stock investors. What’s interesting is that a strong first half of the year has often been a good omen for a strong second half of the year. You might think it would revert to the mean, but that’s not necessarily the case.

  Ryan Detrick of LPL Financial points out that when the S&P 500 gains more than 12.5% in the first half of the year, the median gain for the second half is close to 10%. That’s nearly doubled the other years. In other words, strong gains often lead to more strong gains. Rallies build on themselves. Of course, that will eventually lead to a breaking point.

  The Bull Market for Crap

  While I doubt we’re at a breaking point just yet, there’s been a disturbing trend of a lot of terrible companies turning to the public market to raise tons of cash. I suppose that’s how markets are designed to work, but it’s a little unsettling that’s so many unsound companies can effortlessly rake in so much from investors.

  Bloomberg notes that since March, almost 100 money-losing companies have raised money via secondary offerings. That’s twice the number of profitable companies.

  According to Sundial Research, over the past 12 months, 750 unprofitable companies have turned to the secondary market. That’s the widest margin between money-making and money-losing firms in nearly 40 years.

  There may be a few factors driving this phenomenon. For one, the higher-quality companies may already be flush with cash thanks to a strong market, a recovering economy and low interest rates. As the pandemic broke, many companies were quick to raise cash so they had enough protection to ride out the storm. Now that rates are still low, it’s probably not worth it to pay off those credit lines. That could be leading to a wave of buyouts.

  Also, the booming market for lower-quality stocks adds extra incentive for these companies to raise money. That’s just natural supply and demand. I can’t blame low-quality companies for taking advantage of a good market for them. Several of the meme stocks already have raised money.

  This isn’t just happening in the stock market. Junk bonds are now yielding just over 4%. That’s an all-time low. In fact, the spread between junk debt and investment-grade is the narrowest it’s been in over a decade. Crap is in, and the crappier the better.

  Here’s a long term chart of junk bonds. Sorry, I mean “high yield” bonds.

  

  Of course, it’s important that low-quality sectors have their day in the sun. That’s how marginal areas can thrive. However, our concern is when it overshoots any reasonable expectations. Some low-quality companies will improve even though the odds are against them.

  This raises some interesting questions about investment analysis. So much of valuation analysis works on a disconnect between price and value. But what’s interesting is how price can impact value.

  Let me explain what I mean. Is AMC a good company? Not at all. But that didn’t stop them from raising a ton of cash thanks to an inflated stock price. Heck, if folks are going to throw money your way, why not take it? All that new cash is a big help to AMC’s business. As a result, the business is truly more valuable. AMC’s finances are better. A change in price caused a real increase in value. In fact, thanks to the new cash, AMC got a credit-rating upgrade.

  Investor George Soros wrote about this process in his book, The Alchemy of Finance. Soros calls the interplay between price and value the General Theory of Reflexivity. (I tried to read the book a few times and didn’t get far.)

  I suspect that the run for low-quality may be nearing an end. At the Financial Times, Michael Mackenzie writes:

  Other strategists are looking at the merits of shifting towards “quality” companies that are well managed with strong balance sheets and steadily increasing dividends. After the stirring rebound of lower quality companies that populate the value stock universe, these are looking more attractive on a relative basis.

  BlackRock’s benchmark of high-quality companies is currently trading at its largest discount to the Russell 1000 index in more than two decades. That reflects how investors have sought recovery stories in companies that were hit hard by lockdowns in the leisure, travel and retail industries.

  “We are still very value tilted, but we are starting to dial that back and look at the quality trade,” says Tony DeSpirito, chief investment officer of US fundamental active equity at BlackRock. While he expects that value and cyclical shares have not fully exhausted their run, the clock is ticking.

  Once the economy shifts into a mid-cycle phase, history shows that quality shares start outperforming.

  I wouldn’t be surprise to see a turn to quality sometime soon.

  Facebook Becomes a Trillionaire

  Yesterday, shares of Facebook (FB) rallied after a judge dismissed two anti-trust complaints. The stock gained more than 4% and FB’s market cap broke the $1 trillion barrier.

  Facebook becomes the fifth member of the “four comma” club. The others are Apple, Amazon, Google and Microsoft. What’s most interesting about Facebook is that it made the journey in the fastest time. The company was founded, famously, in Mark Zuckerberg’s dorm room 17 years ago.

  I’m reminded of the scene in The Social Network when Sean Parker says, “one million dollars isn’t cool. You know what’s cool? A billion dollars.” Now Facebook is at one thousand times that.

  I found an interesting tidbit at Bloomberg. There are currently 58 Wall Street analysts who follow Facebook. Among those, 49 have it rated as a buy. I can’t imagine what the 49th buy opinion has to say that hasn’t been covered by any of the other 48. What’s the point of analysis if everyone agrees with each other? Just three analysts rate Facebook a sell.

  Speaking of the ultra-wealth, Morgan Housel tweets that Steve Ballmer’s net wealth is about $100 billion. That’s especially impressive because he wasn’t a founder of Microsoft. He was employee #30. Also, Ballmer hasn’t sold as much stock as Bill Gates has. I’m pretty sure that Gates would be the richest person in the world if he had held onto all his shares.

  But I find Ballmer’s enormous wealth fascinating because so much of it came after he left Microsoft. Here’s a chart of MSFT since Ballmer left:

  

  Wow! Shares of MSFT didn’t perform terribly well when Ballmer was CEO. He came in for a lot of criticism and some prominent folks on Wall Street urged him to step down. It’s a tough job, so I’m not going to pile on.

  Since Satya Nadella took over as CEO seven years ago, the stock has been a big winner. No one has benefitted as much as Steve Ballmer. That’s an impressive achievement to profit off of getting replaced. He’s now one of the wealthiest people who has ever lived. In any event, Ballmer’s Clippers are trailing the Suns 3-2.

  That’s all for now. I’ll have more for you in the next issue of CWS Market Review.

  – Eddy

• Home Prices Are Soaring
  Eddy Elfenbein, June 29th, 2021 at 10:06 am

  The housing market is hot. Today’s Case-Shiller report shows that home prices rose at an annualized rate of 14.6% in the 12 months end in April. That’s fastest in 30 years of data. It’s an increase from 13.3% for the 12 months ending in March.

  Phoenix, San Diego, and Seattle reported the highest year-over-year gains. All were up over 20% from the year before.

  “April’s performance was truly extraordinary. The 14.6% gain in the National Composite is literally the highest reading in more than 30 years of S&P CoreLogic Case-Shiller data,” said Craig Lazzara, managing director and global head of index investment strategy at S&P DJI.

  Not only did home prices rise in all 20 cities, but the price gains accelerated in all as well and were in the top quartile of performance historically.

  Five cities – Charlotte, Cleveland, Dallas, Denver and Seattle – saw their largest annual gains ever.

• FactSet Reports Earnings of $2.74 per Share
  Eddy Elfenbein, June 29th, 2021 at 9:08 am

  This morning, FactSet (FDS) reported fiscal Q3 earnings of $2.74 per share. That missed estimates by two cents per share and it’s down from $2.86 per share one year ago.

  “I’m pleased with the acceleration in our top line and proud of our record of returning value to our shareholders every year since we became a public company 25 years ago,” said Phil Snow, CEO, FactSet. “Demand for our open content and analytics platform continues to fuel our growth as clients pursue their own digital transformations. We believe that the next generation of digital solutions we are building for the financial community will enable us to grow faster.”

  I was I could share Mr. Snow pleasure. This was a decent quarter for FactSet but I was expecting more.

  Revenues increased by 6.8% to $399.6 million. At the end of the quarter, FactSet’s Annual Subscription Value, or ASV, stood at $1.6 billion. That’s up $100 million in the past year. That’s an important indicator of future revenue. What concerns me is that FactSet’s operating margin slipped to 29.5%. That’s down 3% over the past year.

  One bright spot is that the company increased its organic ASV plus professional services outlook to be in the range of $85 million to $95 million.

  Some more details. At the end of the quarter. FactSet’s client count stood at 6,172. The company’s user count is up to 155,004. Annual ASV retention was greater than 95%. When expressed as a percentage of clients, annual retention improved to 91%, year over year.

  During the quarter, FactSet bought 178,100 shares of its stock for $57.6 million. That’s an average price of $323.25. In the current program, there’s $292.4 million left to buy back stock.

  FactSet didn’t change its full-year earnings forecast of $10.75 to $11.15 per share. I thought there was a good chance they’d increase the range.

  So far this year, FactSet has made $8.32 per share. That implies FactSet expects Q4 earnings to range between $2.43 and $2.83 per share. Wall Street currently expects $2.80 per share.

  Here’s an updated look at FactSet’s guidance:

  

• Morning News: June 29, 2021
  Eddy Elfenbein, June 29th, 2021 at 7:06 am

  EU Watchdog Takes Deep Dive Into Banks’ Use of Tech

  China’s Central Bank Strikes Positive Tone as Economy Stabilizes

  Don’t Let the Hawkish Talk Fool You. Fed, ECB, BOJ Will Stay Relatively Loose

  Wall Street Funnels Cash to Investors on Stress-Test Success

  Commodity Traders Harvest Billions While Prices Rise for Everyone Else

  Markets Work, But Untangling Global Supply Chains Takes Time

  High Lumber Prices Add Urgency to a Decades-Old Trade Fight

  Lower Rents? Check. Speakeasy? Check. How Office Landlords Are Enticing Tenants.

  As Regulatory Scrutiny Intensifies, Crypto Exchange Binance Jumps on the NFT Bandwagon

  Clean Energy ETFs Take a Hit, but Money Keeps Flowing In

  United Goes All-In on Premium Flyers With 270 Jets, Upgrade

  Facebook Stock Hits an All-Time High After Judge Dismisses FTC Complaint

  Oil Drops as COVID-19 Surges Threaten Fuel Demand Outlook

  Gas Stations Are Running Out of Gas Ahead of the Holiday Weekend

  Juul Will Pay $40M to Settle Suit Over Marketing to Minors

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• Is Buffett Looking at Hershey?
  Eddy Elfenbein, June 28th, 2021 at 12:04 pm

  The stock market is mostly flat today. On Friday, the S&P 500 closed at its 33rd all-time high this year. Charlie Bilello points out that since the start of 2013, the S&P 500 has made 327 all-time highs.

  This looks to be one of the best first halves on record. In fact, a strong first half has often been followed by a strong second half. Ryan Detrick notes that when the market gains more than 12.5% during the first six months of the year, the median return of the following six months has been close to 10%. That’s nearly double the return of the other years.

  Hershey (HSY) got to a new high today. The New York Post reported that the Hershey jet was spotted in Omaha.

  A jet owned by candy maker Hershey made an unusual trip to Omaha, Nebraska, the home of Warren Buffett, according to an analyst with a history of spotting deals through plane records.

  Don Bilson, head of event-driven research at Gordon Haskett, said in a note Thursday that a plane tracked as being owned by Hershey made a June 12 trip to Omaha.

  Is there a Buffett deal in the works? One sticking point is that the Hershey Trust owns a majority of shares. Warren Buffett is about the only person who could win their votes.

  There’s not much economic news today, but this is jobs week. Later in the week, we’ll get the jobs report plus several key turn-of-the-month economic reports.

• Morning News: June 28, 2021
  Eddy Elfenbein, June 28th, 2021 at 7:06 am

  Binance, the World’s Largest Cryptocurrency Exchange, Gets Banned by UK Regulator

  Bitcoin Leads Crypto Rally in Defiance of Regulatory Crackdown

  Crypto’s Top V.C. Is Playing the Long Game

  How Two Start-Ups Reaped Billions in Fees on Small Business Relief Loans

  Blue Collars Have Outpaced White Collars in Pay—At First Glance

  Where Jobless Benefits Were Cut, Jobs Are Still Hard to Fill

  Fed’s Rosengren Says U.S. Can’t Afford Housing Market ‘Boom and Bust’

  Illegal Gambling Mocks The Economics Profession’s Fed Obsession

  China’s Envision to Build Renault $2.4 Billion Battery Plant

  Google’s Cookie Delay Is Bittersweet for Trade Desk

  United Airlines Closes in on $30 Billion Post-Pandemic Jet Order

  NBA Star Risks Billions for Failing to Diversify Executive Ranks

  Swiss Bank UBS to Allow Most Staff to Adopt Hybrid Working

  Burberry Shares Tumble After CEO Resigns to Join Rival

  The Cryonics Industry Would Like to Give You the Past Year, and Many More, Back

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• Morning News: June 25, 2021
  Eddy Elfenbein, June 25th, 2021 at 7:03 am

  China’s PBOC Leads the Fed in Weaning Economy Off Stimulus

  China Crushed Jack Ma, and His FinTech Rivals Are Next

  China’s Ban Forces Some Bitcoin Miners to Flee Overseas, Others Sell Out

  Bitcoin to Become Legal Tender in El Salvador on Sept 7

  ‘For The Bitcurious’—Tesla Billionaire Elon Musk Suddenly Sends The Dogecoin Price Sharply Higher After Trashing Bitcoin

  Supreme Court Kills The Fannie And Freddie Preferred Trade

  Job Hole or Inflation? Fed Policymakers Split Over Risk View

  Wall Street Sees Big Wish Granted in Biden’s Infrastructure Deal

  Why Washington Can’t Quit Listening to Larry Summers

  Ousting Toshiba Chairman, Foreign Investors Score Breakthrough in Japan

  Panasonic Sells Tesla Stake for $3.6 Billion

  Amazon and Google Face UK Competition Probe Over Fake Reviews

  Teamsters Pass Resolution to Unionize Amazon Drivers, Warehouse Workers

  Nike Earnings Beat Expectations. Why Its Stock Is Jumping.

  Phantom Goldman Banker Is Bait in Swiss Trader Kidnapping ‘Trap’

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