Archive for September, 2021

• Morning News: September 13, 2021
  Eddy Elfenbein, September 13th, 2021 at 7:05 am

  El Salvador Runs a Bitcoin Scam

  Britain Prepared for a Jobs Crisis, Just Not the One It Got

  Wall Street Braced for ‘Far Stickier’ Inflation to Test Markets

  One Sign That the Fed Changed Everything in Corporate Bonds

  From Zippers to Glass, Shortages of Basic Goods Hobble U.S. Economy

  In Social Policy Bill, Businesses See a Lot to Like. They Oppose It.

  Green Steel Becomes a Hot Commodity for Big Auto Makers

  Can A Green-Economy Boom Town Be Built to Last?

  In Fresh Regulatory Move, China Tells Tech Giants to Stop Blocking Rivals’ Links

  Evergrande 75% Haircut Is Now a Base Case for Bond Analysts

  Alibaba Stock Tumbles After Report Says Beijing Wants to Break Up Alipay

  Investors Panic as Blackstone Walks Away from a China Real Estate Deal

  Kansas City Southern Chooses Suitor in Bid for North American Rail Link

  To Survive the Pandemic, a Secret Nintendo Cafe Is Secret No Longer

  Why Is PAC-12 Football So Awful? An Economic Progress Case For Its Demise

  Racist Emojis Are the Latest Test for Facebook, Twitter Moderators

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• Morning News: September 10, 2021
  Eddy Elfenbein, September 10th, 2021 at 7:04 am

  Act Fast or Miss the Digital Payments Boat, BIS Tells Central Banks

  ‘The Lady Isn’t Tapering,’ Says Lagarde as ECB Slows Asset Purchases

  ‘Reversing Gears’: China Increasingly Rejects English, and the World

  Deutsche Team Sees Risk of ‘Hard’ Equity Valuation Correction

  Yes, Dow 36,000 Was Very Wrong

  Cargo Congestion Worsens With More Ships Waiting to Enter U.S. Ports

  Fed Officials’ Trading Draws Outcry, and Fuels Calls for Accountability

  Skilled Workers Are Scarce, Posing a Challenge for Biden’s Infrastructure Plan

  Businesses Question Logistics, Cost of Biden Vaccine Plan

  Talent War May Drive Up Junior Banker Pay Even More, Says Moelis

  Harvard’s $42 Billion Fund to Stop Investing in Fossil Fuels

  Uber Eats, DoorDash, Grubhub Sue New York City Over Legislation on Commission Caps

  Smart Glasses Made Google Look Dumb. Now Facebook Is Giving Them a Try.

  DOJ Looking Into Conduct of Allianz Fund Managers

  The CFA Route to Finance Is Cheap But Proving Very Stressful

  In Slasher Film ‘Candyman,’ the Horror Is U.S. Housing Policy

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• Morning News: September 9, 2021
  Eddy Elfenbein, September 9th, 2021 at 7:02 am

  Did Bitcoin’s El Salvador Debut Dud Doom Crypto?

  Bitcoin and Meme Stock Traders Are Tired of ‘Buying the Dip’

  Traders Rush to Dump China Tech Stocks as Gaming Targeted Again

  China Factory Inflation Surge to Add Pressure to Global Prices

  It’s a Lehman Moment, Not Volcker, That China Should Fear

  Top EU Court Gives Broad Protection to Term ‘Champagne’

  Debt Ceiling, Meet Domestic Forever Wars

  From 4% to 45%: Energy Department Lays Out Ambitious Blueprint for Solar Power

  Investors Betting on ‘Stable’ Choice of Powell Renomination at Fed

  Building A More Sustainable Car, From Headlamp to Tailpipe

  The Mighty Pickup Slims Down

  Ford to End Manufacturing in India, Take $2 Billion Hit

  Morgan Stanley Raises $3.1 Billion for Global Real Estate Bets

  A Major Decision From The FDA Today Could Dramatically Reshape The Vaping Industry

  How the Pandemic Turned Humble Shipping Containers into the Hottest Items on the Planet

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• CWS Market Review – September 8, 2021
  Eddy Elfenbein, September 8th, 2021 at 7:41 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.)

  What Happened to Value?

  A few days ago, the great tweeter Ramp Capital, asked, “What useless talent would you like to have that you can’t profit from?”

  Nate Geraci answered, “Value investing.”

  Value investing

  — Nate Geraci (@NateGeraci) September 5, 2021

  I have to admit I laughed.

  It’s sadly true. Value investing hasn’t been a very good strategy for the last several years. In fact, value investing has lagged the overall market for more than 14 years. The last value peak came in May 2007.

  How could this be? When I was getting my MBA, we were all taught that value investing was one of the strategies that could beat the market over the long term. There are gobs of academic studies to back this up.

  The idea is simple enough: Load up on stocks with low P/E Ratios or high dividend yields, sit back, wait and eventually count your winnings. It makes sense. Value stocks were stocks that were tossed aside by the market for whatever reason, so value investors simply profited from stocks regressing to the mean.

  But what’s happened since 2007? To be precise, value investing has been unprofitable. It’s merely been less profitable than growth investing. To be sure, there have been periods of value lagging before. But that’s usually been two to three years. Nothing like 14. The current growth cycle will soon be old enough to get her learner’s permit.

  Here’s a chart of the Vanguard Value ETF (VTV), in black, along with the Vanguard Growth ETF (VUG), in blue, since May 2007.

  

  Yikes! So what happened to value? The answer is interesting because it’s not really about value. Instead, it’s about how we measure value. This is what happens when you blindly follow one metric without looking at the broader picture. The value indexes are made based on a stock’s price-to-book ratio. By book value, we mean the accounting value of the company.

  But this isn’t a neutral factor. Not by a long shot. The book values of many financial and energy stocks are very elevated. As a result, lots of stocks are being mislabeled, in my opinion, as being value stocks.

  For example, nearly every major bank has a book value that’s fairly close to 1.0. Not many are above 1.6. Citigroup’s (C) is just 0.79. This means that nearly every major financial company gets put in the value bin. The same is true for many energy companies, but that’s not how it should work.

  Ideally, the relative performance of the value index should reflect investors’ appetite for risk. Now it’s simply an index that’s heavily slanted to large oil companies and the major banks. Banks haven’t done that well since the financial crisis and the price of oil peaked in 2008. The value indexes aren’t telling us that value has been weak. Instead, they’re just reflecting the changes happening in two sectors of the economy.

  Let’s look at some numbers. The S&P 500 Value Index currently has a 21.1% weighting in financial stocks and a 5.2% weighting in energy stocks. Meanwhile, financial stocks make up just 2.8% of the S&P 500 Growth Index. Energy stocks are a scant 0.1%. Banks and financials have nearly ten times the weighting in value that they do in growth.

  This is an important lesson in stock analysis. Effect A may not be caused by Factor A. Instead, the inputs can be all wrong and as a result, you’re getting bad outputs.

  If I had my way, the value and growth indexes would not be determined by the particular accounting of different industry sectors. Instead, I would base them on how each stock behaves. If a stock broadly moves with other value stocks, then it’s a value stock. Same for growth. The judgment of the market is smarter than that of accountants.

  Free Onions!

  It’s time to free onions. By that, I don’t mean cost-free onions. Instead, I mean we should liberate onions!

  In the United States of America, it’s against the law to trade onion futures. In 1958, Congress passed the Onion Futures Act. This sounds like something made up by a satirical newspaper, but it’s all true.

  How did this law come to be? Well, that’s an interesting story.

  **Eddy lights his pipe**

  It started back in 1955. That’s when two onion traders, Sam Siegel and Vincent Kosuga, cornered the market for onions. Think Goldfinger, but onions instead of gold.

  It turns out that there are many layers to this story. It’s a dicey situation and it may end in tears. (Sorry.)

  Onion trading was actually a big deal years ago. It was one of the most popular contracts on the Chicago Mercantile Exchange. Siegel and Kosuga gradually bought millions of onions. They then shorted onion futures and dumped their vast onion horde on the market. The price for onions plunged. The price for a 50-pound bag of onions fell from $2.75 to just 20 cents. So many onions were going to Chicago that there were shortages in the rest of the country.

  At one point, a 50-pound bag of onions was worth less than the bag that held them. As you might imagine, the public was not pleased. Siegel and Kosuga made millions. Meanwhile, farmers were crushed as they held vast amounts of worthless onions.

  When the people get angry, that’s when politicians jump in. Congress passed the ban and President Eisenhower signed it into law. The bill was sponsored by Congressman Gerald Ford.

  As a side note, the ban provided economists with a real-world arena to test an economic question: Does the presence of a futures market make the price of the underlying commodity more or less volatile? In other words, is speculation good or bad? Like many things economic, there’s conflicting data.

  In recent years, onion prices have been very volatile. I think we’ll soon see onions futures return to the market.

  (Yesterday, someone on Reddit wondered if their grocer’s coupon for onions violated the law. It doesn’t.)

  Stock Focus: Reynolds Consumer Products

  This week’s featured stock is Reynolds Consumer Products (REYN). I have to confess that I love consumer products companies.

  I say this for several reasons.

  The first is that these are often products consumers pretty much have to buy. Reynolds for example, makes Reynolds Wrap. Everyone has heard of it and nearly everyone uses it.

  This is important because when the economy goes into a nose-dive, folks generally don’t cut back much on their household items. Instead, you’ll see broad weakness in areas like vacation-oriented businesses or homebuilders.

  When the economy is on its knees, people cut back on the expensive stuff. Sales of Reynolds Wrap, not so much.

  

  This is also important because we’ll witness steadier business performance. When looking at the financial statements of a consumer products company, we’ll probably see steady increases in sales, profits and dividends. This makes forecasting much easier, and that makes it easier for us to value a stock.

  As a stock-picker, I’m always leery of companies that rely too much on “the promise” of future growth. With these defensive companies, there’s less guesswork.

  Found in Nearly Every American Kitchen

  First, let’s look at the back story of Reynolds Consumer Products. Reynolds’s products can be found in 95% of American kitchens. Open one drawer and you’ll see Reynolds Wrap and Reynolds Aluminum Foil. Look under the sink and there are the Hefty Bags. Look somewhere else and you’ll see paper plates and cups. Reynolds makes the stuff you usually don’t think about but would certainly miss if it wasn’t around.

  Reynolds also does a nice business with “private labels.” In plainer terms, this means Reynolds also makes the store-brand knock-off stuff you see in the shopping aisles. The private label business usually does better during a recession, but Reynolds does well since they have both ends of the market covered.

  Reynolds is also the exclusive private label supplier to Amazon.

  

  Reynolds usually ranks #1 or #2 in just about every product segment. Most shoppers know the names and that helps brand loyalty. The company generates $3.2 billion in sales annually.

  Who doesn’t love a red solo cup?

  The company used to be part of Alcoa, but they were sold off to a private equity firm a few years ago. Reynolds then had its IPO in January of last year. This was before the coronavirus hit the U.S. economy and stock market.

  The IPO was priced at $26 per share, and investors liked what they saw. On the first day of trading, the shares got as high as $29.46. Within a few days, they were on the doorstep of $32 per share. The rally soon ended as the economy went into lockdown and the shares plunged below $22.

  That’s actually not so bad when you compare it to everyone else. When people get scared, they seek out quality.

  Pretty soon, Reynolds made back everything it lost and by early June, the stock made an all-time intra-day high of $36 per share. Since then, the stock has slowly drifted lower. When a good stock lags like this, it gets my attention.

  Reynolds has already increased prices twice this year without any major problems. That’s a very good sign. In previous issues, I’ve talked about how the ability to raise prices is a good sign of having a competitive edge.

  I also like that the company generates a lot of cash flow. One of my concerns is that the company carries a lot of debt. (That’s often a shady IPO strategy. The mother company shoves its debt onto the company they’re about to spin off.) While Reynolds does have a lot of debt, it can be managed; but it will take time and, of course, money. In fact, the company has already pared back its debt position.

  Last month, Reynolds reported fiscal Q2 earnings of 39 cents per share on sales of $873 million. That topped estimates by one penny per share. Reynolds expects full-year earnings between $1.54 and $1.64 per share. That’s probably too low but only by a few cents per share. Reynolds pays a quarterly dividend of 23 cents per share. That works out to a yield of 3.30%.

  There’s a lot I like about Reynolds Consumer Products. If the Q3 earnings report is good, REYN could be a member of our 2022 Buy List.

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

  – Eddy

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• Sherwin-Williams Lowers Guidance
  Eddy Elfenbein, September 8th, 2021 at 11:33 am

  This morning, Sherwin-Williams (SHW) lowered its sales guidance for Q3. It’s actually not as bad as it sounds. Hurricane Ida took her toll. Also, rising prices are impacting SHW’s business. Importantly, Sherwin’s full-year sales and earnings guidance is unchanged.

  Let’s get to the details. For Q3, Sherwin-Williams now expects sales to be “up or down by a low-single digit percentage over third quarter 2020.” The previous guidance was up mid-to-high single digits.

  For the full-year, Sherwin sees sales up by “a high-single to low-double digit percentage.” For earnings, Sherwin still expects $9.15 to $9.45 per share.

  “We continue to see strong demand across the pro architectural and industrial end markets we serve,” said Chairman, President and Chief Executive Officer, John G. Morikis. “However, persistent and industry-wide raw material availability issues have not improved as anticipated, impacting our ability to fully meet the strong demand. Raw material availability negatively impacted consolidated sales by approximately 3.5% in our second quarter, and we previously communicated that we anticipated less of an impact in the third quarter. We are now expecting raw material availability, including the unfavorable impact of Hurricane Ida, to negatively impact our third quarter consolidated sales by a high-single digit percentage.

  “At the same time, our total cost basket, including raw materials, transportation and labor, continues to move upward. As a result of these increasing costs and in addition to the significant pricing actions we have already taken, we have announced a 4 percent surcharge in The Americas Group effective September 20 through the end of the year. We are confident in our ability to offset inflationary pressures, and we will continue to implement additional pricing actions across our segments over the remainder of this year and into next year as necessary. Our full year sales and diluted net income per share guidance remains unchanged, with full year 2021 adjusted diluted net income per share expected to increase 13.6% at the midpoint of the range compared to the prior year. We will provide an update on our full year outlook with our third quarter results on October 26, 2021.”

  The shares are down some in today’s trading, but it’s not that bad.

  

• Morning News: September 8, 2021
  Eddy Elfenbein, September 8th, 2021 at 7:05 am

  Bitcoin Nurses Losses in Wake of El Salvador’s Glitched Rollout

  High Natural Gas Prices Strain Europeans, Weighing on Recovery

  Japan Bulls Pray for a Helicopter Lift After Suga’s Demise

  Inflation Is Popping From Sydney to San Francisco. It May Be a Good Sign.

  George Soros Warns BlackRock’s Investment in ‘Repressive’ China Risks US National Security

  Nobelist, Senior Democratic Economist Stiglitz Says Fed’s Powell Should Go

  Wall Street’s ESG Loans Charge Corporate America Little for Missed Goals

  Texas Abortion Law Could Cost Companies Millions as Others Cut Ties

  Money, Mimicry and Mind Control: Big Tech Slams Ethics Brakes on AI

  Plant-Based Foods Expand, With Consumers Hungry for More

  Next Food Frontier: Fish Made From Plants, or in a Lab

  JPMorgan to Buy Majority Stake in Volkswagen’s Payments Business

  PayPal Snaps Up Japanese Buy-Now-Pay-Later Unicorn for $2.7 Billion

  This 17-Year-Old Korean CEO Made $1 Million in Sales This Year. Now He’s Onto His Next Venture

  Cash Is King for America’s Pandemic Newlyweds

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• September 6: The Traditional Market Peak
  Eddy Elfenbein, September 7th, 2021 at 11:51 am

  Yesterday was September 6 which is the traditional peak of the stock market. From September 6 until October 29, the Dow Jones Industrial Average has lost an average of 2.25%.

  That may seem small but it’s very large for an average of 125 years. After October 29, the market perks up again and does well through the new year.

  Here’s what the average stock market year looks like. I used a base of 100 on January 1.

  

  After Friday’s jobs report, I tweeted, “There are 108.4 million Americans who are either unemployed or out of the job market entirely.”

  This tweet got some pushback, and some of it sarcastic, pointing out that children, the disabled and the elderly are to blame.

  I thought this criticism was interesting because it highlights an important distinction between how economists view the economy and how normal people view the economy. (In this case, non-economists are normies and economists are not.)

  The non-economists stressed that retired people and others aren’t to blame. They have an excuse to not work. They view the issue through a narrative of someone’s actions being to blame.

  But here’s the important part: the economy doesn’t care. The economy is amoral. It doesn’t matter if you’ve earned your retirement or not. The economy only cares about the ratio of workers to non-workers. Desert has nothing to do with it.

  Imagine if you’re a castaway on an island with six other people. Everyone works, but as the years go by, the other castaways may have to retire from the daily labor. By the end, you may be the only one working to support the others. Saying they have an excuse may indeed be accurate, but it doesn’t matter to your little island economy. Again, all that matters is the ratio of workers to non-workers.

  Pointing out the retired or disabled folks isn’t contradicting the point; it is the point.

• Morning News: September 7, 2021
  Eddy Elfenbein, September 7th, 2021 at 6:59 am

  El Salvador Becomes First Country to Adopt Bitcoin as National Currency

  Mark Mobius Says El Salvador Unlikely to Spur More Bitcoin Adoption

  Crypto and Sports: A Marriage Made in … Well, We’ll See

  EU to Kick Start Its Landmark Green Bond Sales in October

  Life After the ECB? The Tapering Debate Begins

  China Trade Surges to New Records on Strong U.S., EU Demand

  Warning of Income Gap, Xi Tells China’s Tycoons to Share Wealth

  Soros Calls BlackRock’s China Investment a ‘Tragic Mistake’

  U.S. Congress Stuck Between a Rock and a Hard Place on Raising Debt Limit

  From Cradle to Grave, Democrats Move to Expand Social Safety Net

  A Big Pharma CEO Is Battling Wall Street’s Most Feared Fund

  In Silicon Valley, Criminal Prosecutors See No Evil

  Lawsuits Over ‘Misleading’ Food Labels Surge as Groups Cite Lax U.S. Oversight

  Biden’s Electric Car Plans Hinge on Having Enough Chargers

  Toyota to Spend $13.5 Billion to Develop Electric Vehicle Battery Tech by 2030

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• Morning News: September 6, 2021
  Eddy Elfenbein, September 6th, 2021 at 7:12 am

  China’s ‘Mr. Income Distribution’ Explains Common Prosperity

  Oil Down After Deep Saudi Price Cuts Spur Demand Concerns

  Bitcoin Price Pump Movement Grows Ahead of El Salvador’s Adoption

  Aluminum Jumps Again as Guinea Coup Adds to Supply Worries

  Crypto Banking and Decentralized Finance, Explained

  We’ll Give You a Week Off. Please Don’t Quit.

  Jobless Are Stuck in Backlog Nightmare as Benefits Expire

  When Hard Jobs Turn Hazardous

  A Century Ago, Miners Fought in a Bloody Uprising. Few Know About It Today.

  Goldman Lines Up $5 Billion Petershill Private Equity Asset Float

  Tesla and Apple Are a Clear Match, But Their Products Oddly Don’t Work Well Together

  BMW CEO Expects Chip Supply to Remain Tight for Another 6-12 Months

  Texas City to Offer Samsung Large Property Tax Breaks to Build $17 Billion Chip Plant

  How’s Hollywood to Plan When It Doesn’t Know Who’s Watching What?

  Disney’s ‘Shang-Chi’ Breaks Labor Day Record With Asian Turnout

  Kraft Heinz to Pay More Than $62 Million to Settle SEC Accounting Charges

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• The August Jobs Report
  Eddy Elfenbein, September 3rd, 2021 at 8:37 am

  The August jobs report is out! The US economy created 235,000 new jobs last month. That’s well below expectations of 720,000. That’s not exactly the Fed’s “substantial further progress.”

  The unemployment rate fell to 5.2% which is a post-Covid low. There were 243,000 private sector jobs added, and in manufacturing, 37,000 jobs were created.

  August’s total was the worst since January and comes with heightened fears of the pandemic and the impact that rising Covid cases could have on what has been so far a mostly robust recovery. The weak report could cloud policy for the Federal Reserve, which is weighing whether to pull back on some of the massive stimulus it has been adding since the outbreak in early 2020.

  “Today’s jobs report reflects a major pullback in employment growth likely due to the rising impact of the Delta variant of COVID-19 on the U.S. economy, though August is also a notoriously difficult month to survey accurately due to vacations,” said Tony Bedikian, head of global markets at Citizens.

  The jobs gain number for July was revised from 943,000 to 1,053,000. June was revised to 962,000 from 938,000.

  Average hourly earnings rose by 0.6% last month. That’s a very big increase. Over the past year, wages rose by 4.3%. The labor force participation rate was 61.7%. The broader U-6 rate was 8.8%.