Archive for September, 2021

• Morning News: September 17, 2021
  Eddy Elfenbein, September 17th, 2021 at 7:00 am

  Europe’s Energy Crisis Is Driving Up Natural Gas Prices Worldwide

  Do We Need to Shrink the Economy to Stop Climate Change?

  China Applies to Join Pacific Trade Pact to Boost Economic Clout

  China Adds $14 Billion Cash as Evergrande’s Pain Roils Markets

  Inquiry Finds World Bank Officials, Including Now-I.M.F. Chief, Pushed Staff to Inflate China Data

  November? December? Fed’s ‘Taper’ Timeline Tied to Volatile Jobs Data

  If Your CEO Talks Like Kant, Think Twice Before Investing

  Wall Street Influencers Are Making $500,000, Topping Even Bankers

  Hedge Funders Are Chasing Crypto Despite Warnings of a Possible Crash

  Banks Beware, Amazon and Walmart are Cracking the Code for Finance

  Retailers Rethink Pandemic-Battered Manhattan

  ‘Shang-Chi’ Wins a Warm Asia Greeting. Then There’s China.

  Where Did It All Go So Wrong for Juul?

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• Jobless Claims and Retail Sales
  Eddy Elfenbein, September 16th, 2021 at 11:17 am

  Two economic reports this morning. First, unemployment claims rose to 332,000. That’s up 20,000 from last week which itself was revised higher by 2,000. Last week’s figure of 312,000 is the current pandemic low.

  By the way, the unemployment figures are roughly in line with some of the numbers we saw seven years ago. In other words, we’re getting back to something that looks like normal.

  The other report was retail sales. For August, retail sales rose by 0.7%. In the last year, retail sales are up 15.1%. That number surprised Wall Street. Economists had been expecting a decline of 0.8%. The number for July was revised downward from -1.1% to -1.8%.

  Economists had expected that consumers cut back their activity as the delta variant continued its tear through the U.S. Persistent supply chain bottlenecks also were expected to hold back spending as in-demand goods were hard to find.

  The pandemic’s impact did show up in sales at bars and restaurants, which were flat for the month though still 31.9% ahead of where they were a year ago.

  However, sales were strong for most areas during the month, when back-to-school shopping generally results in a pickup in activity, especially so this year as schools prepared to welcome back students after a year of remote learning.

  The headline number would have been even better without a 3.6% monthly drop in auto-related activity; excluding the sector, sales rose 1.8%, also well above the 0.1% expected gain.

  Just a reminder that the Fed meets again next week.

  

• Morning News: September 16, 2021
  Eddy Elfenbein, September 16th, 2021 at 7:04 am

  When the Dragon Sneezes, Europe Catches a Cold

  Japan Cuts Economic View on Weaker Production, Spending Due to COVID Revival

  These Charts Show Impact of China’s Casino Crackdown on Macau

  No Chinese Stock Left Among Global Top 10 as Tencent Slides

  China Intensifies Hunt for Cryptocurrency Miners in Hiding

  The Coinbase Spat With the SEC Ups the Ante in Washington’s Crypto Fight

  Democratic Tax Proposal Takes Aim at ETFs

  Boom for Banks as M&A and Pandemic Boost Corporate FX Needs

  Delta Tells the Economy, Not So Fast

  ‘Just Get Me a Box’: Inside the Brutal Realities of Supply Chain Hell

  U.S. Poverty Fell Last Year as Government Aid Made Up for Lost Jobs

  The Battle for Digital Privacy Is Reshaping the Internet

  What the Privacy Battle Upending the Internet Means for You

  Climate Change Calls for Backup Power, and One Company Cashes In

  Chevron CEO Warns of High Energy Prices and Supply Crunches

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• August Industrial Production Increased by 0.4%
  Eddy Elfenbein, September 15th, 2021 at 1:19 pm

  A quiet day so far. The stock market is up today after falling six times in seven days. I don’t think you’ll see many shallower losses for six-in-seven-day stretches. We also came somewhat close to the 50-day moving average. That can be an important psychological breaking point, but not always.

  Once again, energy stocks are doing the heavy lifting. Energy had been lagging since March. Only recently has it perked up again.

  The Federal Reserve released the industrial production report this morning. Last month, industrial production increased by 0.4%. The Fed said that Hurricane Ida chopped off 0.3% from that number. The increase for July was revised up to a gain of 0.8%.

  Industrial production is now 0.3% below its pre-pandemic peak. This was our sixth monthly increase in a row.

  

• Morning News: September 15, 2021
  Eddy Elfenbein, September 15th, 2021 at 7:04 am

  ‘Fortress Australia’ Creates Automatic Visa to Let In Top Talent

  Macau Casinos See $18 Billion Wipeout as China Tightens Grip

  China Evergrande’s Liquidity Crisis Deepens, Report Flags Interest Payment Miss

  Prices Climbed More Slowly in August, Welcome News for the Fed

  Should Biden Reappoint Jerome Powell? It Depends on His Theory of Change.

  U.S. Poverty Fell Last Year as Government Aid Made Up for Lost Jobs

  Food Hasn’t Been This Expensive in Over 50 Years

  Elizabeth Warren Asks the Fed to Break Up Wells Fargo

  A Crack Opens in the App Store Economy

  SoftBank CEO Son Says Smart Robots Can Revitalise Japan Growth, Competitiveness

  Google Fined $177 Million in South Korea Over Thwarting Potential Android Rivals

  Microsoft Hikes Dividend and Unveils $60 Billion Stock Buyback Program

  Chevron to Triple Low-Carbon Investment

  Peter Thiel Gamed Silicon Valley, Donald Trump, and Democracy to Make Billions, Tax-Free

  Steve Cohen Throws Himself Into Crypto After Early Doubts

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• CWS Market Review – September 14, 2021
  Eddy Elfenbein, September 14th, 2021 at 7:17 pm

  (This is the free version of CWS Market Review. If you like what you see, then please sign up for the premium newsletter for $20 per month or $200 for the whole year.)

  The August Inflation Report

  The August inflation report came out this morning, and the evidence tells us that inflation is cooling off. If this trend continues, then the Federal Reserve will have been vindicated and inflation was, indeed, transitory.

  Let me caution you that we’re not out of the inflation woods just yet, but the numbers we got this morning are encouraging.

  In the report, the Bureau of Labor Statistics said that consumer prices rose by 0.27% last month. That was below expectations. While that’s not ideal, it’s a lot better than the numbers we saw in the five prior months. In July, inflation rose by 0.47% and the month before that, it was up by 0.90%. These were some of the highest numbers we’ve seen in decades.

  

  If we look at core inflation, which strips out volatile food and energy prices, then inflation was up just 0.10% last month. Compare that to June when core prices rose by 0.88% or to April when core inflation reached 0.92%. That was its highest rate in 40 years.

  Over the trailing 12 months, the numbers are still unpleasant as they include the ugly April-to-July period. Over the last year, headline inflation was up 5.20% while core inflation increased by 3.98%. Expect these to gradually drift lower.

  This has been a good reminder for investors that when in doubt, pay attention to the bond market. James Carville, President Clinton’s advisor, famously said that if he were to be reincarnated, he would want to come back as the bond market because “you can intimidate everybody.”

  While we’ve seen scary headlines and some alarming data about inflation, the bond market has been indifferent. The yield on the 10-year Treasury peaked at 1.76% in February. It’s been trending down most of the time since. In fact, the scarier the headlines, the more the bond market has ignored it.

  What does the inflation report mean for investors? Overall, this is good news for a few reasons. I still think it’s likely that the Federal Reserve will start to pare back its massive bond buying before the end of the year, but any rate hike is still a long way off. (By the way, the Fed meets again next week.)

  I like to look at the futures market to see what traders think. Unlike economists, they have skin in the game. Even by July 2022, the futures market thinks there’s a 10% chance that the Fed will have raised rates by then. In other words, that’s 10 more months of 0% interest rates.

  Stock Returns and Real Yields

  I’ve been particularly impressed by the very, VERY low yield on the 10-year TIPs. By this, I mean the yield on the “Treasury Inflation-Protected” bonds. It’s now at -1.05%. That’s the yield adjusted for inflation, also known as the real yield.

  Tracking how the stock market performs relative to the real yield is very revealing. I suspect that this may become a more common topic in the future because the issue gets to the heart of stock valuation.

  If someone says that the stock market is cheap or expensive, naturally you need to ask, compared to what? For judging stocks, the 10-year Treasury yield is a good starting place. The problem with looking at Treasury yields is that inflation can greatly impact them. That’s where the TIPs come in because these bond yields are adjusted for inflation.

  Treasuries are, of course, less risky than stocks. So if real yields are going for 3% or 4%, it may make sense to ditch your stocks and hang out in bonds. Conversely, if real yields are low, or even negative, it’s like an open invitation to buy stocks.

  What does the data have to say? I went to the St. Louis Fed’s economic database (an invaluable resource). I downloaded all the daily closings for the 10-year TIPs yield which goes back to 1983. I also downloaded all the daily total returns for the Wilshire 5000 stock index. That’s the broadest measure of the stock market.

  I found that if you take all the days collectively when the 10-year TIPs has yielded 1.67% or higher, then you see that the stock market had a negative return. Stocks were a net money loser.

  But when the TIPs yield has been 0.00% or lower, then the stock market has delivered an average return of more than 38% per year. This makes sense, but seeing the numbers is still surprising.

  

  In short, the higher the TIPs yield, the worse it is for stocks. The lower the TIPs yield, the better it is for stocks. Nothing more complicated than that.

  The TIPS tipping point seems to be at 0.5%. Anytime the yield on the 10-year TIPs is 0.5% or greater, then the stock market has delivered an annualized return of 5.1%. That’s probably less than the return of the TIPs bonds. But when the 10-year TIPs yield is under 0.5%, then the stock market has delivered an annualized return of 23.3%.

  As I said before, the current yield on the 10-year TIPs is -1.05%. That isn’t just low – it’s close to as low as it’s ever been. The 10-year TIPs yield hasn’t been positive in 18 months. For now, the bond market is signaling more good news for stocks.

  Stock Focus: Paycom Software

  This week’s featured stock is Paycom Software (PAYC). Paycom’s job is to make your human-resources department more manageable. This isn’t so easy in the modern business climate. HR departments have to deal with lots of government regulations on top of needs specific to their industries. That’s not so difficult for a large corporation, but the HR requirements for a small start-up can be a major headache. That’s where Paycom comes in.

  Paycom describes itself as a “leading provider of comprehensive, cloud-based human-capital management solutions delivered as software as a service.” The company makes and sells software that lets companies easily hire, manage, train, and most importantly, pay their employees. The advantage that Paycom brings is that its software centralizes the whole process.

  For example, consider the process of finding a new employee. This is a major decision for any young company. Paycom can help with every step of the process. That includes tracking interviews and background checks.

  Once a new employee joins up, there’s more paperwork to deal with. The employee has to make decisions regarding health insurance and retirement savings. On top of that, there’s on-board training. Paycom streamlines the entire process. This saves a company money, and, just as importantly, it saves time. Paycom currently has over 30,000 clients, and they’re very popular with their clients. The company’s annual retention rate consistently exceeds 90%.

  As this chart tells you, business has been good for Paycom:

  

  Even after a new employee joins, Paycom still helps. Its software helps manage sick and vacation days as well as keeping track of training. Paycom provides functionality and data analytics that businesses need to manage the complete employment lifecycle, from recruitment to retirement.

  Employees at customer firms love Paycom’s ease of use. Their software lets employees manage their own HR needs in the cloud, which reduces the administrative burden on employers and increases employee productivity.

  This is a very lucrative sector. I project that Paycom’s earnings next year will be ten times what they were in 2015. This is one of the most innovative mid-cap stocks I can think of. You might assume that Paycom is another tech outfit based in Silicon Valley. Nope. Try Oklahoma City! But that shouldn’t be surprising. This is the world we live in today.

  The company was founded in 1998, and it IPOed seven years ago. Paycom’s business has been growing at a rapid clip. Earnings-per-share jumped from 19 cents in 2014 to $3.49 last year. I think they’ll clear more than $4.40 per share this year and as much as $5.60 per share next year.

  

  Last month, Paycom reported fiscal Q2 earnings of 97 cents per share. That topped estimates by 13 cents per share. Total revenues rose 33.3% to $242.1 million. Importantly, 98.1% of those revenues are recurring. That’s a very good sign.

  Investors should also look at cash flow instead of focusing solely on earnings. For Q1, Paycom’s adjusted EBITDA, which is a measure of cash flow, came in at $87 million. That’s up from $61.2 million in the same period last year. Traders were impressed by the results. The stock jumped 11% after the earnings report.

  Chad Richison, Paycom’s founder and CEO said, “The fundamentals of our business continue to strengthen, as demonstrated by our very strong second quarter results.”

  For Q3, which ends in a little over two weeks, Paycom expects revenues between $249 million and $251 million, and EBITDA between $87 million and $89 million. For all of 2021, Paycom sees revenues of $1.036 billion to $1.038 billion, and EBITDA between $410 million to $412 million. The earnings report will be due out in early November.

  I’ll caution you that Paycom is hardly a value stock, but its growth potential is very strong. Paycom is trading at 80 times my already optimistic forecast for next year.

  This is an excellent company. I’m going to keep a close on eye it. If Paycom falls to $300 as it did this spring, it could be a welcome addition to our portfolio.

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

  – Eddy

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• Inflation Appears to Be Chilling Out
  Eddy Elfenbein, September 14th, 2021 at 9:01 am

  This morning we got the inflation report for August. The numbers look to be pretty good. The headline rate of inflation rose by 0.3%. The core rate, which excludes food and energy prices, rose by just 0.1%.

  Over the past year, headline inflation has increased by 5.3% while core inflation is up by 4.0%.

  Here’s the monthly CPI data (headline rate, seasonally adjusted). So far, the rate of increase is falling. For now.

  

• Morning News: September 14, 2021
  Eddy Elfenbein, September 14th, 2021 at 7:03 am

  EU Seeks U.S. Alliance on Investor Screening to Confront China

  In Argentina’s North, A ‘White Gold’ Rush for EV Metal Lithium Gathers Pace

  Oil Hits 6-Week High as U.S. Gulf Braces for Storm Nicholas

  Equities Have Little to Fear Now Fear Itself Has Made a Comeback

  ‘Inflation Guy’ Has Been Waiting Years to Tell You About the I-Word

  High Meat Prices Are Helping Fuel Inflation, And A Few Big Companies Are Being Blamed

  U.S. Solar Gets More Expensive in Threat to Climate Change Fight

  A Plan to Hasten the Sale of Surplus Federal Property Gets Bogged Down

  For Military Families, V.A. Loans Are a Lifeline, but With a Catch

  NFTs Have Cathie Wood Excited: ‘This is How I Felt When the Internet Came About’

  Intuit to Buy Mailchimp for $12 Billion

  Apple Must Decide How Badly It Wants 30% Fee After Court Ruling

  Apple Issues Emergency Security Updates to Close a Spyware Flaw

  How China Evergrande’s Debt Troubles Pose a Systemic Risk

  ‘Lie Flat’ If You Want, But Be Ready to Pay the Price

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• Late-Day Rally Saves Us from Six in a Row
  Eddy Elfenbein, September 13th, 2021 at 4:47 pm

  

  Thanks to a late-day rally, the S&P 500 avoided its sixth daily down day in a row. By the closing bell, the S&P 500 advanced 0.23%. A small gain, but we’ll take it. The next test for the market will be the inflation report which is due out tomorrow morning.

  Today’s gains were heavily tilted toward energy stocks. The S&P 500 Energy index was up nearly 3% today. What’s interesting is that after so many years of lagging, the Energy Index no longer makes up much of the overall S&P 500.

  Schlumberger was up about 5% while ExxonMobil closed higher by 2.5%. Many banks also did well. Outside of that, it was a pretty flat day. On our Buy List, Thermo Fisher Scientific (TMO), Trex (TREX) and Abbott Labs (ABT) made new 52-week highs.

  For tomorrow’ inflation report, Wall Street expects a 0.4% increase for headline inflation and a 0.3% increase for core inflation.

• Stocks Look to Snap Five-Day Losing Streak
  Eddy Elfenbein, September 13th, 2021 at 9:57 am

  Through Friday, the stock market fell for five days in a row. It’s up so far today, but it’s still early. The big news will come tomorrow when the government releases the inflation report for August.

  Markets are on tenterhooks for critical U.S. inflation data that could buffet stocks and bonds if they shift expectations about Federal Reserve stimulus withdrawal and the timing of interest-rate hikes.

  A backdrop of slower reopening in pandemic-stricken economies due to the delta strain, and price pressures stoked by supply snarls led to declines in both global stocks and Treasuries last week.

  Some measures of producer prices released Friday topped expectations, with a gauge of final demand jumping 8.3% year-over-year amid persistent disruptions in supply.

  The U.S. economy also has to deal with a rash of shortages. It seems like there are shortages of everything.

  Shortages of metals, plastics, wood and even liquor bottles are now the norm.

  The upshot is a world where buyers must wait for delivery of items that were once plentiful, if they can get them at all. Rash has piles of tents she can’t ship because she can’t get the right aluminum tubing for their frames, for instance, while others lack the right zippers.

  Along with the shortages come hefty price increases, which has fueled fears of a wave of sustained inflation.