Archive for March, 2022

• Powell Strikes a Hawkish Tone
  Eddy Elfenbein, March 21st, 2022 at 2:32 pm

  Federal Reserve Chairman Jerome Powell spoke today before an economic policy conference. Powell sounded markedly more willing to use interest rates to combat inflation.

  In particular, he said that the Fed could start using 0.5% rate increases. Before last week’s increase, which was the first in more than three years, there had been some speculation that the Fed would increase by 0.5%. Ultimately, the Fed raised rates by just 0.25%.

  I think the Fed is making two errors. The first is that the inflation threat is more serious than they realize. Their latest economic projections are evidence of that. The other issue is the threat of an economic slowdown, though not necessarily a recession.

  Finally, what will it take to restore price stability? The ultimate responsibility for price stability rests with the Federal Reserve. Price stability is essential if we are going to have another sustained period of strong labor market conditions. I believe that the policy approach that I have laid out is well suited to achieving this outcome. We will take the necessary steps to ensure a return to price stability. In particular, if we conclude that it is appropriate to move more aggressively by raising the federal funds rate by more than 25 basis points at a meeting or meetings, we will do so. And if we determine that we need to tighten beyond common measures of neutral and into a more restrictive stance, we will do that as well.

  That’s good to hear that they are aware of the problem. However, too often Fed chairs rely on tough talk rather than concrete action. Powell also said that the Fed could soon start unwinding its ginormous balance.

• Bonds Hit the Skids
  Eddy Elfenbein, March 21st, 2022 at 9:43 am

  The stock market has had a nice rally over the last four days. The S&P 500 managed to close above its 50-day moving average on Friday. Still, I’m skeptical that this burst will last.

  For one, it’s been a dramatic spike upward. That’s usually not a good sign of lasting strength. Also, it’s heavily tied to high beta stocks. The low volatility names haven’t moved that much. I’d much rather see a rally that lifts many boats.

  This morning, Berkshire Hathaway said it’s buying insurance company Alleghany for $11.6 billion. That works out to $848.02 per share in cash. By the way, Alleghany has one of the coveted single-letter ticker symbols, “Y.” I wonder if anyone will go for it.

  The real action lately hasn’t been in the stock market but in the bond market. Bonds are having one of their worst stretches in years. Here’s a chart of the Treasury Bonds ETF (TLT):

  

• Morning News: March 21, 2022
  Eddy Elfenbein, March 21st, 2022 at 7:09 am

  Pressed to Choose Sides on Ukraine, China Trade Favors the West

  Agriculture Giants Stay in Russia Despite Calls to Exit Over Ukraine War

  Wheat Prices Soar on Ukraine Fears, but U.S. Growers Can’t Cash In

  Fleeing War in Ukraine, They’re Met With Employers Offering Paychecks

  Silicon Valley’s Wealthiest Russian Is Carefully—Very Carefully—Distancing Himself From Putin

  How to Fight Inflation in Wartime

  With Inflation Surging, Biden Targets Ocean Shipping

  Gas Prices Upend Small Business

  Chevron Pulls Union Workers from California Refinery Ahead of Strike

  One of Wall Street’s Most Vocal Bears Says Sell the Rally

  U.S. Home Sales Tumble; Higher Prices, Mortgage Rates Eroding Affordability

  The Latecomer’s Guide to Crypto

  New York City’s Renewed Vibrancy Is Hiding Deep Economic Pain

  Toronto, the Quietly Booming Tech Town

  Warren Buffett to Buy Alleghany for $11.6 Billion in Return to Dealmaking

  Thoma Bravo to Buy Anaplan for $10.7 Billion

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• Morning News: March 18, 2022
  Eddy Elfenbein, March 18th, 2022 at 6:18 am

  Japan Parts Makers Halt Output After Quake, Another Blow To Supply Chain

  Russia’s War in Ukraine Is Choking the World’s Supply of Natural Resources

  How the War in Ukraine Could Slow the Sales of Electric Cars

  Retreat From Russia Riddled With Risks For Western Banks

  Amid Invasion of Ukraine, I.R.S. Aims to Police Oligarch Sanctions

  China’s Information Dark Age Could Be Russia’s Future

  Gig Workers Say High Gas Prices May Be a Breaking Point

  Stock Traders Brace for a $3.5 Trillion ‘Triple Witching’ Event

  USAA is Fined $140 Million For Bad Money Laundering Controls

  The King of Block Trades Is Entangled in a U.S. Probe of Morgan Stanley

  Apple’s Latest iPhone Sidelines Carriers From Buying Process

  Apple’s Hold on App Store Set to Face Significant Challenge From New European Law

  Amazon Closes Deal to Acquire MGM

  GameStop Shares Fall on Surprise Loss

  The 9-to-5 Schedule Should Be the Next Pillar of Work to Fall

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• Morning News: March 17, 2022
  Eddy Elfenbein, March 17th, 2022 at 7:04 am

  China Finds a Way to Do Covid Zero While Keeping Factories Open

  New Covid Wave in China Hits Sellers of ‘Quarantine Insurance’

  Tencent, Alibaba, Meituan Extend Stunning Surge as Traders Cheer Support Vows

  This Tropical Island’s Economy Is Being Crushed by War in Ukraine

  Broke Oligarch Says Sanctioned Billionaires Have No Sway Over Putin

  Nickel Traders Awake to Fresh Mayhem as LME Glitches Again

  Inflation vs. Recession: The Fed Is Walking a Tightrope

  What the Fed’s Rate Increase Means for You

  What You Might Misunderstand About Interest-Rate Hikes

  The U.S. Yield Curve Has Been Flattening: Why You Should Care

  Best Way To Tackle Inflation: Confirm Biden’s Fed Nominations

  Shoppers Reach Their Limits on Some Price Increases

  Carbon-Capture Startup Using Dirt Cheap Material Raises $53 Million

  Former Starbucks CEO Howard Schultz to Return as Chain Faces Union Push, Rising Costs

  Netflix Plans To Start Charging For Password Sharing, And Customers Aren’t Happy

  Examining AMC’s ‘Embarrassingly Stupid’ Investment In A Literal Gold Mine

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• The Fed Hikes
  Eddy Elfenbein, March 16th, 2022 at 2:06 pm

  It’s official. The Federal Reserve has raised interest rates. The new range for the Fed funds rate is 0.25% to 0.50%.

  Looking at the Fed’s projections, the median Fed member sees seven rate hikes this year. That works out to a 0.25% increase at every meeting this year.

  James Bullard was the lone dissenter.

  Here’s the statement:

  Indicators of economic activity and employment have continued to strengthen. Job gains have been strong in recent months, and the unemployment rate has declined substantially. Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher energy prices, and broader price pressures.

  The invasion of Ukraine by Russia is causing tremendous human and economic hardship. The implications for the U.S. economy are highly uncertain, but in the near term the invasion and related events are likely to create additional upward pressure on inflation and weigh on economic activity.

  The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. With appropriate firming in the stance of monetary policy, the Committee expects inflation to return to its 2 percent objective and the labor market to remain strong. In support of these goals, the Committee decided to raise the target range for the federal funds rate to 1/4 to 1/2 percent and anticipates that ongoing increases in the target range will be appropriate. In addition, the Committee expects to begin reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities at a coming meeting.

  In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals. The Committee’s assessments will take into account a wide range of information, including readings on public health, labor market conditions, inflation pressures and inflation expectations, and financial and international developments.

  Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michelle W. Bowman; Lael Brainard; Esther L. George; Patrick Harker; Loretta J. Mester; and Christopher J. Waller. Voting against this action was James Bullard, who preferred at this meeting to raise the target range for the federal funds rate by 0.5 percentage point to 1/2 to 3/4 percent. Patrick Harker voted as an alternate member at this meeting.

• February Retail Sales Rose by 0.3%
  Eddy Elfenbein, March 16th, 2022 at 12:17 pm

  The stock market is up strongly again today. The Nasdaq is up more than 2%. Finance and Tech are leading the way while defensive areas like Utilities and Staples are mostly unchanged.

  There’s talk of a ceasefire but I’m skeptical. Today is another good example of a bounce off the bottom, or near bottom, but I’m suspicious of how long it will last.

  At 2 pm, the Fed will release its policy statement. The Fed is widely expected to increase interest rates by 0.25%. After the meeting, Chairman Powell will hold a press conference.

  We also got the retail sales report this morning. For February, retail sales rose by 0.3%. That was 1% below expectations. If we exclude autos, then sales were up just 0.2%. Expectations were for a gain of 0.9%.

  The spending numbers were well below the rise in prices, which increased 0.8% in February, according to Labor Department data released last week. Retail spending numbers are not adjusted for inflation.

  The biggest dent in February’s numbers came in online shopping, with nonstore sales down 3.7%.

  One bright spot in the data released Wednesday is that January spending was revised up to an increase of 4.9%, a blistering pace that was even stronger than the initial estimate of 3.8%.

  The two-month numbers “suggest that real consumption growth remains reasonably solid” though some headwinds are beginning to show, particularly from expected interest rate increases coming from the Federal Reserve, said Andrew Hunter, senior U.S. economist at Capital Economics.

  “With real disposable incomes having already been falling since mid-2021, as earlier fiscal support was withdrawn, and the more general surge in prices took its toll, real consumption growth still looks likely to slow over the coming months, particularly when the personal savings rate is already below its pre-pandemic level,” Hunter wrote. “It also may not be long before Fed tightening starts to hit spending on big-ticket durables.”

  Consumers, however, remain flush with cash, finishing 2021 with $1.4 trillion in savings though the personal savings rate, most recently at 6.4%, has been coming down steadily during the Covid pandemic era.

  Demand has been extraordinary for goods over services, and supply has struggled to keep up. That has fueled inflation running at a 7.9% rate on a 12-month basis, the fastest pace in more than 40 years.

• Morning News: March 16, 2022
  Eddy Elfenbein, March 16th, 2022 at 7:04 am

  Xi Spurs Frantic Stock Buying With Lifeline for China Market

  India Acts To Seize Gap In Wheat Export Market Left By Ukraine War

  Oil’s Wild Gyrations Are Forcing Traders Off the Crude Market

  Fresh Chaos for Nickel as LME Hit By Glitch While Prices Plunge

  The Global Fight Over Chips Is Only Going to Get Worse

  Intel Plans $36 Billion in European Chip Plant Investments

  A Question of Default

  The $140 Billion Question: Can Russia Sell Its Huge Gold Pile?

  A New Meme-Stock Frenzy Led AMC to Gold Mine Stake

  Russia’s Brain Drain Becomes a Stampede for the Exits

  Abramovich Investment Vehicle Shifted Control Shortly After Invasion

  Biden to Withdraw Nomination for Fed’s Top Bank Cop

  Big Four Accounting Firms Come Under Regulator’s Scrutiny

  Dozens of BuzzFeed Employees Claim They Were Illegally Shortchanged in I.P.O.

  Beating Japan at Its Own (Video) Game: A Smash Hit From China

  Starbucks Wants to Ditch Those Disposable Cups for Good

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• CWS Market Review – March 15, 2022
  Eddy Elfenbein, March 15th, 2022 at 7:44 pm

  An Historically Bad Start to the Year

  Yesterday was the 48th trading day of this year. So far, this year ranks as the fourth-worst start to the year on record for the S&P 500 through 48 trading days. Some of that can be blamed on the calendar since the market peaked on the first trading of the year.

  Late yesterday, we came close to making a new closing low for the year, but a late-day rally helped us miss that by a whisker. The current low came one week ago, on March 8, when the S&P 500 closed at 4,170.70. I think there’s a good chance we’ll break below that soon.

  

  What leads me to say that? The key to watch is the 50-day moving average (the blue line). This is simply the average of the S&P 500 over the last 50 days. It’s a quick and easy way of measuring the market’s momentum. Whenever the index is below its 50-DMA, as it is now, that usually means it’s a difficult market.

  The stock market tends to be trend-sensitive. By that, I mean that good markets usually lead to good markets, and bad markets often to lead to more bad markets. I know that sounds obviously true, but there’s a lot of fancy math behind it. The turning points are important. This is why the 50-DMA has a decent track record. I like to call it, “the dumb rule that works well for very smart reasons.”

  Another important aspect of the stock market being below its 50-DMA is that volatility tends to be much higher. For example, In the last 23 trading sessions, the S&P 500 has only had one daily gain of less than 1%. There have been lots of big up days and lots of big down days, but not many mildly good days.

  Historically, most of the best and worst daily moves have come when the S&P 500 is under its 50-DMA. One of the oddities of the stock market is that so many great days have come during awful markets. Most people have it backward: it’s not that volatility causes bear markets; it’s just that bear markets are more volatile.

  Volatility is not like some gremlin that sits above the market and then swoops in to cause mayhem. Instead, it’s part of the market. When prices go down, markets get jittery.

  Speaking of which, today is the 89th anniversary of the Dow’s best day ever. The markets had reopened after FDR announced a four-day bank holiday. Back then, the new president was sworn in on March 4. The time off worked. The Dow soared an astounding 8.26 points. That’s peanuts today, but in 1933 it was a gain of 15.34%. In today’s terms that would be a gain of roughly 5,000 points. That record stands today.

  Tomorrow is the second anniversary of the Dow’s second-biggest loss ever. The index fell 12.93% for a loss of 3,000 points. Only the 1987 crash was worse. The market plunge two years ago even eclipsed the worst one-day losses in 1929. People were definitely scared two years ago but it was a great time to invest. The Dow is up 60% since then.

  A few days later, on March 18, hedge fund manager Bill Ackman went on CNBC and implored President Trump to shut down the economy. Ackman said, “America will end as we know it” unless we “completely close down the economy. Shut it down for 30 days. Hell is coming.”

  Scary stuff, but Ackman was completely wrong. The market reached its low a few days later.

  Obviously, the events in Ukraine are on our minds. We’re also witnessing the effects in financial markets. Last week, the price for oil shot up to $130 per barrel. Not surprisingly, some oil producers want to ramp up production. Thanks to that, or to the promise of more oil, the price has backed down. Oil is currently around $95 per barrel.

  According to the latest data, prices at the pump have topped off for now. At least they’re no longer soaring. I’m sure we’ll see the impact in upcoming CPI reports. Inflation is many things, but it’s not transitory. Get used to seeing more of it.

  The Fed to Raise Rates

  The Federal Reserve started its two-day meeting today. The policy statement is due out tomorrow afternoon and Chairman Powell will hold a post-meeting press conference. We can almost certainly expect the Fed to announce its first interest rate increase in more than three years.

  It was almost exactly two years ago that the Fed lowered rates to the floor. While the rate increase may get a lot of attention, bear in mind that it will probably be an increase of just 0.25%. The Fed is still a long way from impinging on the economy. Real interest rates, meaning adjusted for inflation, are still well into negative territory.

  The Fed has a tough job right now because inflation is attacking us on three different fronts. One, naturally, is the commodity surge from the invasion of Ukraine. There’s also the supply-chain crisis. Lastly, there’s the fact that the government has thrown tons of money at the economy. The Fed isn’t responsible for all of them. Still, I wouldn’t be surprised to see inflation soon hit 10% on a trailing 12-month basis.

  The sanctions taken against Russia are starting to have a major impact. The ruble has fallen off a cliff and the country is nearing a default. The country hasn’t had a foreign currency default since 1917. Tomorrow, the government needs to pay $117 million to bond holders. The country is supposed to pay in dollars, but at this hour, it’s not clear what the Russians will pay in. Maybe yuan. Maybe euros. Who knows?

  Between the Russian government and its major oil corporations, the country has $150 billion in foreign currency debt. In 1998, Russia defaulted on some ruble-denominated debt.

  There’s an old saying that if you owe the bank $100, then you have a problem. If you owe the bank $1 million, then the bank has a problem. While many Russia-based firms may soon be unable to pay their bills, we’ll soon learn who in the West isn’t getting paid.

  Risk Is Returning

  One of the keys to understanding the current market is how the Fed behaved once Covid struck. The Fed responded to Covid in the way it should have responded to the financial crisis. If you recall, in the financial crisis, the Fed dithered for some time before it realized the extent of the problem. Ben Bernanke thought it was an issue that was contained to sub-prime mortgages. Well, it wasn’t.

  Once the reality of Covid became clear, however, the Fed threw everything it had to keep the economy afloat. The important aspect for investors is that the Fed radically reduced market risk for investors. That led to an enormous boom in more speculative stocks. What do Price/Earnings Ratios matter when interest rates are on the floor?

  Check out this chart which compares the S&P 500 High Beta Index (black) with the S&P 500 Low Vol Index (blue). This covers from the market low of two years ago until this past November.

  

  Low vol stocks did well, but high beta stocks tripled! It’s important to understand that the Fed’s policies caused this to happen. In a normal market, investors would be alarmed by a highly volatile stock’s market risk. But for 20 months, that didn’t exist. As a result, high beta soared.

  Now, it’s payback time. Rates are going higher and the market’s focus is changing. Since November, low volatility stocks have been back in favor. This trend will probably last for several months. Now let’s take a closer look at one of my favorite low vol stocks.

  Stock Focus: Silgan Holdings

  This week, I wanted to highlight Silgan Holdings (SLGN), which is one of our favorite conservative stocks from our Buy List. Silgan is one of the leading makers of metal containers in the world. Boring, sure, but it’s also a very good business. By my count, Silgan has increased its earnings in 16 of the last 18 years.

  In January, Silgan said that it had Q4 earnings of 79 cents per share. Wall Street had been expecting 73 cents per share. For its part, the company said that Q4 earnings would be between 69 to 79 cents per share.

  

  For 2021, Silgan made $3.40 per share. That’s up 11% from 2020. Sales were up 17.3%. Silgan had record free cash flow of $466.1 million. Best of all, the company expects another good year for 2022.

  The CEO said, “we estimate adjusted earnings per share in 2022 in the range of $3.80 to $4.00, which represents a 15 percent increase at the midpoint over record 2021 levels. Our free cash flow estimate for 2022 is estimated at approximately $350 million.”

  Silgan closed today at $44.53 per share. This means that Silgan is going for less than 12 times this year’s earnings. For Q1, Silgan expects earnings to range between 80 and 90 cents per share. The next earnings report should be due out next month.

  If you want to learn more about Silgan and the other stocks on our Buy List, please sign up for our premium service.

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

  – Eddy

• Morning News: March 15, 2022
  Eddy Elfenbein, March 15th, 2022 at 7:07 am

  China’s Covid Lockdowns Set to Further Disrupt Global Supply Chains

  Relentless Selling in China Stocks Evokes Memories of 2008 Crash

  Russia Is Spiraling Toward a $150 Billion Default Nightmare

  Goldman CEO Says It’s Not Wall Street’s Job To ‘Ostracize Russia’ Over Ukraine War

  Gas Taxes Get Rolled Back Across U.S. as Pump Prices Soar

  Uber and Lyft Add Fuel Surcharges to Rides as Gas Prices Surge Nationwide

  Why Your Electric Bill Is Soaring—and Likely to Go Higher

  From Beer to Semiconductors, War Will Hit U.S. State Economies

  Powell Admires Paul Volcker. He May Have to Act Like Him.

  Manchin Won’t Support Raskin for The Fed, Imperiling Her Nomination

  Investors See Risks Spiking, Fear Market-Wide Liquidity Crunch

  Discord Interviews Banks for Possible Direct Listing

  ‘No Code’ Brings the Power of A.I. to the Masses

  Oatly’s Growing Pains Trip Up Pioneer of Oat Milk

  After Walt Disney, Robert Iger Heads to the Metaverse

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