Archive for July, 2021

  • Jobless Claims Fall to 360,000
    , July 15th, 2021 at 10:18 am

    The stock market is down so far in early trading. We gapped up early yesterday and gradually drifted lower as the day wore on. By the closing bell, we had a slight gain.

    This morning’s jobless claims reported came in at 360,000. That’s the lowest since March 2020.

    Jay Powell is testifying again today. Yesterday was the House’s turn. Today, it’s the Senate.

    A number of years ago, I trekked down to Capitol Hill to watch the semi-annual testimony. The prepared remarks are interesting. The rest of the time is grandstanding by members of Congress. I got the seat right behind Bernanke. Sorry for the blurry picture, but that’s how you know I really took it.

  • Morning News: July 15, 2021
    , July 15th, 2021 at 7:07 am

    China’s Economy Is Still Growing. But the Recovery Is Slowing Down

    Inflation? Not in Japan. And That Could Hold a Warning for the U.S.

    Wall Street Has Surrendered to the $500 Billion ETF Rush

    The ECB Starts Work on Creating a Digital Version of the Euro

    Why Wall Street Is Afraid of a Digital Dollar

    Hong Kong Arrests Four in Alleged $155 Million Crypto Scheme

    JPMorgan Hoards Cash as Dimon Expects Rates to Rise

    How CEOs Think the Covid Crisis Will Shape Flying

    Inside Facebook’s Data Wars

    Twitter’s Disappearing Snapchat Clone…Disappears

    Startup Revolut Hits $33 Billion Valuation

    TSMC Eyes Expansion in U.S., Japan to Meet Sustained Chip Demand

    Mastercard Has Been Banned From Issuing New Cards in India

    What Happens When a Private Club Goes Public?

    The Unlikely Road to Riches for Russia’s Newest Billionaire

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  • S&P 500 Hits New High on Powell’s Remarks
    , July 14th, 2021 at 10:42 am

    The stock market has regained some ground it lost yesterday. The S&P 500 has been up to another all-time intra-day high this morning. We had some bank earnings yesterday and today.

    Bank of America is down about 4% this morning. The bank reported earnings of 80 cents per share which was a three-cent beat. However, BAC missed its revenue estimate.

    Wells Fargo had a very good quarter. For Q2, the bank earned $1.38 per share. That was 40 cents above estimates. The stock is about flat so far today.

    Jerome Powell is testifying before Congress today and tomorrow. His full remarks are here. Here’s a sample:

    Over the first half of 2021, ongoing vaccinations have led to a reopening of the economy and strong economic growth, supported by accommodative monetary and fiscal policy. Real gross domestic product this year appears to be on track to post its fastest rate of increase in decades. Household spending is rising at an especially rapid pace, boosted by strong fiscal support, accommodative financial conditions, and the reopening of the economy. Housing demand remains very strong, and overall business investment is increasing at a solid pace. As described in the Monetary Policy Report, supply constraints have been restraining activity in some industries, most notably in the motor vehicle industry, where the worldwide shortage of semiconductors has sharply curtailed production so far this year.

    Conditions in the labor market have continued to improve, but there is still a long way to go. Labor demand appears to be very strong; job openings are at a record high, hiring is robust, and many workers are leaving their current jobs to search for better ones. Indeed, employers added 1.7 million workers from April through June. However, the unemployment rate remained elevated in June at 5.9 percent, and this figure understates the shortfall in employment, particularly as participation in the labor market has not moved up from the low rates that have prevailed for most of the past year. Job gains should be strong in coming months as public health conditions continue to improve and as some of the other pandemic-related factors currently weighing them down diminish.

    As discussed in the Monetary Policy Report, the pandemic-induced declines in employment last year were largest for workers with lower wages and for African Americans and Hispanics. Despite substantial improvements for all racial and ethnic groups, the hardest-hit groups still have the most ground left to regain.

    Inflation has increased notably and will likely remain elevated in coming months before moderating. Inflation is being temporarily boosted by base effects, as the sharp pandemic-related price declines from last spring drop out of the 12-month calculation. In addition, strong demand in sectors where production bottlenecks or other supply constraints have limited production has led to especially rapid price increases for some goods and services, which should partially reverse as the effects of the bottlenecks unwind. Prices for services that were hard hit by the pandemic have also jumped in recent months as demand for these services has surged with the reopening of the economy.

    On our Buy List, shares of Middleby (MIDD) are up again. This could be our fourth up day in a row. The shares are on track to close at a two-month high.

    Broadridge Financial Solutions (BR) made a new all-time high yesterday. The stock is up about 9% in the last month.

  • Morning News: July 14, 2021
    , July 14th, 2021 at 7:04 am

    ECB Poised to Take Next Step in Revolutionizing Euro Zone Money

    China Slams ‘Sinister’ U.S. Over Hong Kong, Digital Trade Deal

    China Deals Another Blow to Its Crypto Miners

    China Traders to Scrutinize Maturing Mega Loan for Policy Clues

    Prices Pop Again, and Fed and White House Seek to Ease Inflation Fears

    U.S. Oil Consumption Surging With Industry Firing at Full Blast

    There’s No Escaping Rising Prices For So Much That We Buy

    After EU Tax Win, Yellen Will Try to Sell U.S. Republicans on Global Tax Deal

    Seven Months and Ticking, the Case for Keeping Powell as Fed Chair Builds

    The Pandemic Forged New FIRE Followers, With a Difference

    Disney’s Brand Protector and Power Behind the Power Is Stepping Down

    How Germany Hopes to Get the Edge in Driverless Technology

    Behind the Lordstown Debacle, the Hand of a Wall Street Dealmaker

    BlackRock Profit Beats Estimates As Assets Soar to Record $9.49 Trillion

    NYC Restaurant Breaks World Record With Fancy $200 French Fries

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  • CWS Market Review – July 13, 2021
    , July 13th, 2021 at 5:41 pm

    Before I begin, permit me a brief sales pitch for the premium newsletter. I promise I won’t take long.

    Do you know the difference between a limit order and a stop-market order? Or stop-limit orders and trailing stops? Lots of investors don’t know they can place things like “fill or kill” or “all or none” orders.

    To be a good investor, you should really know all the tools that are available to you. Even a lot of pros get this stuff mixed up.

    Don’t worry, I’m here to help. I’ve written a report, “Your Handy Guide to Market Orders.” It’s free for our premium subscribers. If you’re not a premium subscriber, well heck, then this is the perfect time to join us!

    It’s just $20 per month. Or you may prefer the inflation-fighter’s option of $200 for the entire year. OK, enough of me hocking the letter. But speaking of inflation….

    Highest Core Inflation in 30 Years

    Remember how the Federal Reserve said that inflation will be “transitory”?

    Yeah…about that.

    This morning’s CPI report shows that inflation is still with us, and it’s running as hot as it’s been in years. Apparently, this transitory person may hang around for a while longer.

    Let’s look at the details. The government said that consumer prices rose by 0.90% in June. That’s the largest monthly increase in 13 years. Over the last year, consumer prices are up 5.32%. That’s also the fastest pace in 13 years.

    As a quick side note: Sometimes the “rate over the last 12 months” can be misleading. For example, when you hit a pothole one month, the rate of increase over the coming 12 months will look unusually high. That’s why we often see “highest in 13 years” because it brings us back to the drama of 2008 when prices plunged.

    The inflation story isn’t about food and energy. About one-third of the total increase in the CPI was due to used cars and trucks. (Have you tried to rent a car lately? Or even tried to find a car that’s available to rent? It’s not so easy these days.)

    The core rate of inflation, which excludes food and energy, rose by 0.88% in June. That’s also the highest rate in 13 years. The core rate is, by its nature, more stable than the headline rate. Still, core inflation is on the rise. Over the last year, core inflation is up by 4.53%. That’s the fastest rate in 30 years.

    Here’s a chart that gets your attention:

    Has this changed the outlook for inflation? The answer is…not really. Don’t listen to me, listen to the bond market. The yield on the 10-year bond is below 1.4%. That’s a few points below the rate of inflation. In fact, the yield is down from where it was three and four months ago. If anything, the outlook for inflation is fading.

    The 10-year TIPs rate, meaning the inflation-adjusted rate, is at -0.9%. In effect, investors are paying other people, in real terms, to borrow their money. “Here. Take my money. I’ll pay you.”

    There’s simply no rush to raise interest rates. Fed Chairman Jerome Powell has clearly indicated his willingness to keep on waiting. The futures market doesn’t see the Fed raising interest rates until September 2022. Even by February 2023, the futures market is betting that the Fed will have only hiked rates once. That a 25 basis-point increase over the next 19 months.

    What does this mean for stocks? A few months ago I touched on this subject, and it’s a complicated dynamic. Inflation has an unusual impact on earnings. Not all earnings are the same, and inflation exacts a heavy toll on asset-heavy businesses. Companies with high assets relative to their profits tend to report ersatz earnings.

    Inflation has an impact similar to putting a magnet near a compass. Everything gets a little screwy. Historically, stocks have not performed well during periods of high inflation. Investors who lived through the 1970s will certainly recall that.

    Here’s a study I did a few years ago. I found that stocks perform well until inflation reaches 5.72%. . The two things stocks don’t like are inflation and deflation. The sweet spot is when inflation is boring and between 0% and 3%. That’s when stocks perform the best.

    The other part of the equation is jobs. We’re currently at a very unusual crossroads. There are a lot of jobs and a lot of people out of work. The U.S. has 6.8 million fewer jobs than it had 18 months ago. Still, there are 9.3 million job openings. That’s an all-time record. Near me, it seems that every business is understaffed. I’m sure you’re seeing the same.

    The fancy-pants term for this is “match.” What folks are looking for and what folks have to offer ain’t the same. The solution is simple: time. It will take some time for all this to work itself out.

    What’s the cause for the mismatch? As I see it, there are a few issues happening at once. Some observers are blaming overly generous unemployment benefits. That’s probably playing a role. I would also add the high cost of childcare. The school lockdowns drove this issue. Also, more workers want to work from home. Of course, there are still many Americans who are simply reluctant to return to the office. The WSJ cited a poll that said that 70% of workers in leisure and hospitality say they want to work in a different industry.

    We’ve also seen many Americans decide to accelerate their retirement plans. It’s not so easy to replace long-standing employees.

    That’s the key reason why I think inflation will likely fade over the next few months. There’s a lot of matching to be done. Despite the strong inflation report this morning, I still side with the bond market and the Federal Reserve though I differ from the Fed in that it may take closer to six months.

    Now let’s look at one of my favorite subjects: great stocks that no one knows about.

    Stock Focus: Lancaster Colony

    In the movie The Graduate, Dustin Hoffman is given the famous advice, “Plastics.”

    I wonder how the scene would have played if the advice had been “croutons.” As odd as it may seem, the company Lancaster Colony (LANC) has been an outstanding market performer thanks to its business in salad dressings, croutons, and, to be fair, other food products.

    Last November, Lancaster raised its dividend from 70 cents to 75 cents per share. That marked its 58th consecutive annual dividend increase. That’s an outstanding record. There are only 13 companies with streaks that long.

    Still, Lancaster is barely known. Since October 1990, Lancaster’s stock and dividends have returned more than 135-fold. That’s a lot of croutons. Check out this chart:

    You’d think Lancaster would be widely followed. I see that there are only three analysts on Wall Street who currently follow the stock. It’s not some micro-cap, either. The current market cap is well over $5 billon.

    Lancaster’s last two earnings reports easily beat consensus. That is, if you can call a handful of analysts a consensus. In February, Lancaster reported fiscal Q2 earnings of $1.85 per share. That was 41 cents more than consensus. In May, Lancaster said it made $1.35 per share for fiscal Q3. That beat by 11 cents per share. The Q4 report should be out sometime towards the end of August.

    Update on Simulations Plus

    Good news! Simulations Plus (SLP) got crushed today. I mean that’s good news because I like the stock and I don’t own it.

    Simulations Plus makes software that lets drug companies simulate tests of their products in the virtual world before using any human or animal test subjects.

    That’s a big cost-saver for drug companies. Simulations Plus helps streamline the R&D process by making it faster and more efficient. Not only is this cost effective, but it also helps drug companies in dealing with time-consuming regulatory hurdles.

    I highlighted the stock a few weeks ago. I said that while I like the company, the stock price is way too high. Well, I guess I was right. SLP dropped 18% today.

    In May, I wrote that if the stock ever drops below $40, it could be a very good buy. SLP closed today at $44.03 per share. I’m not fully onboard just yet. Simulations Plus still has some serious issues to address. But I have taken notice. I always like when a promising stock goes on sale. I hope to highlight SLP in a future issue.

    Don’t forget to join our premium service so you get can get “Your Handy Guide to Market Orders.” There’s lots of good info in it.

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

    – Eddy

  • Strongest Inflation in 13 Years
    , July 13th, 2021 at 11:04 am

    The consumer inflation report came out this morning, and “transitory” may still be with us a little while longer.

    Here are the details. Seasonally-adjusted inflation rose by 0.90% last month. That’s the fastest pace in 13 years. The seasonally-adjusted core rate rose by 0.88%.

    “What this really shows is inflation pressures remain more acute than appreciated and are going to be with us for a longer period,” said Sarah House, senior economist for Wells Fargo’s corporate and investment bank. “We are seeing areas where there’s going to be ongoing inflation pressure even after we get past some of those acute price hikes in a handful of sectors.”

    A separate report from the Labor Department’s Bureau of Labor Statistics noted that the big monthly hike in consumer prices translated into negative real wages for workers. Real average hourly earnings fell 0.5% for the month, as a 0.3% increase in average hourly earnings was more than negated by the CPI increase.

    Inflation has been escalating due to several factors including supply-chain bottlenecks, extraordinarily high demand as the Covid-19 pandemic eases and year-over-year comparisons to a time when the economy was struggling to reopen in the early months of the crisis.

    Policymakers at the Federal Reserve and the White House expect the current pressures to begin to ease, though central bank officials have acknowledged that inflation is stronger and perhaps more durable than they had anticipated.

    Fed Chairman Jerome Powell likely will be asked for his views on inflation when he speaks Wednesday and Thursday to separate House and Senate panels. Powell has been steadfast that inflationary pressures are primarily transitory, though a Fed report Friday indicated that upside risks are increasing.

    Over the last 12 months, headline inflation is up by 5.32%. That’s also the fastest pace in 13 years. Used car and truck prices comprised about one-third of the total CPI increase.

    Over the last 12 months, core inflation has increased by 4.53%. That’s the fastest pace in 30 years.

  • Middleby Throws in the Towel
    , July 13th, 2021 at 10:30 am

    Good news today. Middleby (MIDD) said it will not increase its bid to buy Welbilt (WBT).

    Here’s the press release:

    The Middleby Corporation today announced that, under the terms of its previously announced Merger Agreement with Welbilt, Inc., it will not exercise its right to propose any modifications to the terms of the Merger Agreement and will allow the five-day match period to expire. Middleby expects that the Merger Agreement will terminate at the end of the match period today.

    “We believe that the previously agreed terms of the Merger Agreement between Middleby and Welbilt offered significant long-term strategic value to the Welbilt shareholders through the ability to participate in substantial upside opportunity from Middleby’s continued growth, while remaining attractive to our existing Middleby shareholders,” said Timothy FitzGerald, CEO of Middleby. “As we considered our options over the course of the match period, we concluded to deploy our substantial financial resources wisely. We are excited about the momentum of our business and future prospects of our three industry leading foodservice platforms. As a seasoned acquirer, we remain disciplined and committed to ensuring the best outcome for our Middleby shareholders.”

    In accordance with the terms of the Merger Agreement, Middleby will be entitled to a termination fee of $110 million to be paid by Welbilt simultaneously with the termination of the Merger Agreement. “The additional cash infusion Middleby stands to receive upon termination will put us in an even better position to execute on our existing M&A growth strategy, as we continue to build upon our long-standing track record of value-creating deals,” added Mr. FitzGerald. Middleby has completed over 20 acquisitions since 2018 alone, with a history of successfully integrating businesses and realizing significant synergies at the acquired companies.

    “Looking ahead, we remain highly confident in our ability to drive continued growth and profitability and believe we are uniquely positioned to deliver superior value creation for our shareholders,” said Mr. FitzGerald.

    As I see it, Middleby is being paid $110 million to avoid a mistake. The shares have been up as much as 5% today.

  • Morning News: July 13, 2021
    , July 13th, 2021 at 7:07 am

    Bitcoin Miners Navigate Extreme World of Crypto Power-Hunting

    E.U. Delays Digital Levy as Tax Talks Proceed

    Janet Yellen Makes a Case for Ireland to Join the Global Tax Deal

    Biden Team Mulls Digital Trade Deal to Counter China in Asia

    Consumer Price Index in U.S. Forecast to Climb at a Solid Pace

    Fed Chair Powell Charged with Convincing Congress this Week that Easy Policy is Still Needed

    U.S. SEC Focuses On Bank Fee Conflicts As It Steps-Up SPAC Inquiry

    Wall Street Charges Ahead But Some Option Traders Hedge Against Sharp Pullback

    Inflation Is Still High. Used Car Prices Could Help Explain What Happens Next

    Customers Are Back at Restaurants and Bars, but Workers Have Moved On

    Northern U.S. Plains Drought Shrivels Spring Wheat Crop to Smallest in 33 Years, USDA Says

    Boeing Will Slow Work on Its 787 Dreamliner to Fix a New Problem

    Popeyes Stockpiles Chicken Ahead of Nationwide Nugget Debut

    Broadcom in Talks to Buy SAS Institute for as Much as $20 Billion

    Google Fined $593 Million by French Antitrust Agency

    Only the Rich Could Love This Economic Recovery

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  • Lancaster Colony: 58 Consecutive Dividend Hikes
    , July 12th, 2021 at 11:38 am

    Lawrence Hamtil points out that Lancaster Colony (LANC) is “one of 13 companies to raise its cash dividend every year for 58 straight years.”

    Only three analysts follow them. They don’t even have a Wikipedia page. What does Lancaster Colony do?

    From Lawrence: “They sell salad dressing and croutons to households and restaurants.”

  • Damn It Feels Good to Be a Banker
    , July 12th, 2021 at 9:58 am

    Bank profits are soaring. So says The New York Times. What’s causing the good news? Well, there are a few reasons. For one, as the pandemic recedes, consumers are spending again. Also a lot of big Wall Street deals are coming back.

    The banks were prepared for a wave of defaults. There were certainly defaults, but the massive wave never came. Of course, there was a lot of support from the government to keep things afloat.

    This week, we’ll learn a lot more as Wall Street banks report their Q2 earnings. Tomorrow, Goldman Sachs and JP Morgan are due to report. Then on Wednesday, it’s Citigroup’s and Wells Fargo’s turn.

    To give you an idea of how the outlook for banking has changed, three months ago, Wall Street was expecting Goldman Sachs to report Q2 earnings of $8.11 per share. Today that forecast is up to $9.95 per share. Still, many of these large banks are trading at less than 10 times this year’s expected earnings.

    The uncertainty that’s depressing bank stocks will probably dissipate, said Susan Roth Katzke, an analyst at Credit Suisse. She forecast a rally of about 20 percent in some of their shares in the next six to 12 months. They will be fueled by an accelerating recovery, prospects for rising interest rates and increasing loans, Ms. Katzke wrote in a note to investors.

    The big banks are in much better health. Last month, Morgan Stanley and Wells Fargo said they would increase their dividends. The NYT notes that four banks–JPM, BofA, Wells Fargo and Morgan Stanley–have said they’ll buy back $85 billion in shares.