Archive for April, 2022

• The Fed Wanted to Raise by 0.5%
  Eddy Elfenbein, April 6th, 2022 at 2:13 pm

  The minutes are out from the Federal Reserve’s last meeting. It turns out that the Fed wanted to raise interest rates by 50 basis points, but the war in Ukraine changed their minds. If I were a cynical person, I’d say that was a very convenient excuse.

  Many participants noted that—with inflation well above the Committee’s objective, inflationary risks to the upside, and the federal funds rate well below participants’ estimates of its longer-run level—they would have preferred a 50 basis point increase in the target range for the federal funds rate at this meeting. A number of these participants indicated, however, that, in light of greater near-term uncertainty associated with Russia’s invasion of Ukraine, they judged that a 25 basis point increase would be appropriate at this meeting. Many participants noted that one or more 50 basis point increases in the target range could be appropriate at future meetings, particularly if inflation pressures remained elevated or intensified. A number of participants noted that the Committee’s previous communications had already contributed to a tightening of financial conditions, as evident in the notable increase in longer-term interest rates over recent months.

  This seems clear to me that the Fed wants to go 50 at the next three meetings, at least.

• Morning News: April 6, 2022
  Eddy Elfenbein, April 6th, 2022 at 3:56 am

  Why Tracking Putin’s Wealth Is So Difficult

  Oil Fluctuates as EU Avoids Immediate Sanctions on Russia Crude

  U.S. Wants More Oil from Canada but Not a New Pipeline to Bring It

  Yellen to Warn of ‘Enormous Economic Repercussions’ from Ukraine Invasion

  Fed Minutes to Reveal Long-Awaited Details on Balance-Sheet Plan

  Fed’s Brainard Says Reducing Elevated Inflation ‘Is of Paramount Importance’

  Deutsche Bank Is the First Big Bank to Forecast a U.S. Recession

  Pfizer’s $5 Billion Bill for Covid Pills to Take Big Bite from New Pandemic Funds

  Copper Leader Congo’s Addition to Trading Bloc Lures Ecobank

  JetBlue Offers to Buy Spirit in All-Cash Deal

  Starbucks’s Schultz, Back as CEO, Prioritizes Baristas Over Stock Price

  Instacart Faces Turbulence After Pandemic Boom in Grocery Delivery

  Trucking Companies Train You on the Job. Just Don’t Try to Quit

  Fast, The Easy Checkout Startup, Shuts Down After Burning Through Investors’ Money

  Resorts from the Maldives to Cuba Miss Their Russian Tourists

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• CWS Market Review – April 5, 2022
  Eddy Elfenbein, April 5th, 2022 at 9:09 pm

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  Elon Musk Buys a Big Stake in Twitter

  Earlier this week, Elon Musk announced that he had taken a 9.2% stake in Twitter (TWTR). According to SEC rules, you have to make your positions public if you buy more than 5% of a publicly-traded company. The market was euphoric. On Monday, shares of Twitter rallied nearly 30%.

  

  Thanks to his big buy, Musk was given a seat on Twitter’s board of directors. That triggers another SEC rule. Musk can’t be the owner of more than 14.9% of Twitter’s stock until after his term on the board ends which is in 2024. Basically, that means that we shouldn’t expect Musk to bite off many more large pieces of Twitter.

  Musk’s stake in Twitter may sound like a lot, but it’s “only” $3 billion. That’s pocket change for Musk. With a fortune of $267 billion, Musk is the wealthiest man in the world.

  With Monday’s big rally, Musk is already sitting on a nice profit. In this case, the market’s reaction may be more than idle speculation. Don’t expect Musk to be a silent investor. Musk has talked about making changes to the social media site. He has criticized its willingness to ban some well-known individuals while going light on others. Musk even polled his followers to ascertain the popularity of an edit function. (Yep, it’s very popular.)

  With this investment, there’s an odd dynamic at work. A mega-billionaire can quietly buy a stock and then make the news public and watch the market send the investment much higher. Of course, there aren’t many people who can move the market like that. Maybe Warren Buffett is the only other.

  In the past, Musk has hinted that he may want to start a rival to Twitter. I suppose he thought buying the thing was the easiest path. Having a quarter of a trillion dollars opens some options.

  I should say that in a strict numbers sense, Twitter is not a very profitable company. Last year, the company made a profit of 20 cents per share. The shares are currently around $51, which gives the stock a P/E ratio of roughly 250. That’s about 15 times what a normal company would go for.

  Of course, Twitter is not a normal company. This gets to the heart of a matter that’s very difficult for securities analysis: how do you value a relatively new company that’s growing quickly but is not very profitable? Nonconventional businesses should be looked at in nonconventional ways. Personally, I avoid such stocks. It’s not that I’m not a fan of the companies, but I simply can’t see which stock will emerge as the winner.

  If you had gone into a brokerage firm 40 years ago and boldly announced, “Computers are the future! That’s where I want to invest!,” the firm most likely would have recommended stocks like Wang and DEC. Probably IBM. Maybe Apple, but that would have been the oddball choice.

  My point is that even if your thesis was correct and computers had indeed been the future, finding the winners would have been very difficult. There used to be 400 domestic automakers in the U.S., but it wasn’t long before the industry became known as the Big Three.

  I think there’s great potential for Twitter, but the current model isn’t working. If there’s anyone who has the pull to make a big winner out of Twitter, it’s Musk. I wish him well.

  Get Ready for Three Straight 0.5% Hikes

  Tomorrow, the Federal Reserve will release the minutes from their last meeting. Of course, this was the meeting in which the Fed decided to raise interest rates for the first time since 2019.

  My view is that the Fed is way behind the curve and it needs to be far more aggressive in fighting inflation. I’m not alone. James Bullard, the top guy at the St. Louis Fed, agrees. He cast the lone dissenting vote at the last meeting.

  I have to explain something about the Fed’s minutes. They never use specific names. Instead, it’s an amazing study in the use of indefinite pronouns. “Some” said this. “Several” agreed that. “Few” countered with this.

  The minutes can be difficult to decipher, but I want to see how worried the members are about inflation. The minutes are usually released three weeks after the Fed meeting. The next meeting will be in in four weeks.

  For now, the futures market expects to see a 0.5% increase in May, another 0.5% increase in June and another 0.5% increase in July. That’s more aggressive than the Fed has been signaling.

  

  On Friday, the government released the March jobs report. During the month, the U.S. economy created 431,000 net new jobs. That’s another good report. Wall Street had been expecting 490,000. The numbers for January and February were revised higher as well.

  The unemployment rate fell to 3.6%. That’s another post-Covid low. It’s also lower than every single month from January 1970 through August 2019 (see chart above).

  The broader U-6 rate fell to 6.9%. That’s just 0.1% above the all-time low from 2019, although that series only goes back to 1994.

  One weak spot is that average hourly earnings grew by just 0.4%. In the last year, average hourly earnings are up 5.6% which is less than inflation. The next inflation report will be out next week. This report will also be the first one to feel the effects of the war in Ukraine.

  Lael Brainard, who is President Biden’s pick to be the next vice-chair of the Fed, spoke today about the impact of inflation. She underscored an important point that inflation weighs heavily on lower-income consumers. She gave the example of a family that regularly buys a brand-name cereal. When inflation hits, they can easily go to store-brand cereal. But a low-income family that already buys the store-brand can’t make that switch. When inflation is running at 8%, it’s not 8% for everyone.

  Speaking of finding a good bargain, let’s look at a retailer that’s thriving in the Age of Amazon.

  Stock Focus: Five Below

  In recent years we’ve heard a lot about the great “Retail Apocalypse,” and it’s true that Amazon has changed the game permanently for a lot of retailers. We’ve also seen the death spirals of once-mighty retailers like JC Penney and Sears and many others.

  But not everyone is being done in by Bezos and his ubiquitous retail machine. One standout is the quirky Five Below (FIVE).

  There’s something so elementary about Five Below that makes it brilliant. The concept is simple: They don’t sell anything for more than $5.

  The store is specifically geared toward teens and pre-teens. Their tagline says it all: “hot stuff, cool prices.” Five Belows are also purposely located in strip malls. That helps keep the rent down.

  They’ve hit onto something big. The company was founded in 2002 by David Schlessinger and Tom Vellios. These were the guys behind Zany Brainy.

  

  The stock IPO’d ten years ago. Today, there are over 1,200 stores across 40 states. The company has very ambitious plans for growth. Five Below aims to triple its number of stores by end of fiscal 2030.

  So what is it, exactly, that they sell? You name it. As long as it’s less than $5. They sell things like toys and games, or cheap accessories. A lot of it is tacky. A lot of it is silly. But it’s all well-planned.

  Are you in the market for an inflatable furry ottoman? Well, Five Below has got you covered. A pink duffel bag? Yep, they’ve got that too.

  The items aren’t supposed to be important. Instead, they’re supposed to fun impulse buys, but that’s the secret that sets them apart from Amazon. What Five Below shoppers like is the “treasure hunt” experience. A group of friends will spend time digging through their shelves. This is something Amazon can’t recreate online. By the way, the stores do have sections for $10 items.

  Five Below knows their customers. They don’t come in looking for the item they’ll eventually buy. They want to spend time combing through dozens of items before selecting a final few. As odd as it may sound, they come for the Five Below experience.

  Apparently, there’s a lot of business in $5 items. For the fiscal year ended in February, Five Below had sales of $2.85 billion. (That’s a lot of stuffed neon green hippos.) That’s also a 45% increase over the year before.

  Silly stuff is serious business. Gross margins currently run around 36% which is quite good for a low-cost retailer. Operating margins are 12% and net margin comes in at just under 10%. That’s an efficient shop.

  This is no small business either. Five Below currently has a market value of more than $9 billion and it’s a member of the S&P 400 Mid-Cap Index. The CEO summed it up perfectly: “We’re the T.J. Maxx for kids.”

  Here’s what else I like. Five Below has a solid balance sheet. The firm doesn’t owe a dime in long-term debt. Make no mistake, the company got hit hard by the coronavirus lockdown. In June 2021, Five Below reported a fiscal Q1 loss of 91 cents per share.

  That hurt but things are looking much better now. The gradual passing of Covid is also very good news for Five Below. Last week, Five Below reported fiscal Q4 earnings of $2.49 per share. That beat the Street by one penny per share. That was the seventh quarter in a row that Five Below beat the Street. For Q4, earnings grew by 13.2%. In times of inflation, consumers become more price sensitive which is good for Five Below.

  Joel Anderson, President and CEO of Five Below, stated, “We were very pleased with our fourth quarter results that capped off a record year. We delivered sales growth in line with our expectations against the difficult comparison to last year’s stimulus-fueled comparable sales increase of 13.8%, and despite the impact of weather in January. The strength was broad-based, with Sports, Candy, Seasonal and Style worlds outperforming.”

  Let’s look at guidance. For fiscal Q1, Five Below expects sales between $644 million and $658 million, and earnings between 54 and 62 cents per share. For the whole year, Five Below sees sales ranging between $3.16 billion and $3.26 billion, and earnings between $5.19 and $5.70 per share. That’s up from $4.95 per share last year. Frankly, the guidance is a bit lower than I expected.

  Last summer, share of Five Below got $237. The stock has drifted lower since then. On Tuesday, it closed at $165.74 per share. That’s still a little high for me, but I’d be interested if Five Below goes below $140 per share. This off-beat retailer is one to watch.

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

  – Eddy

• Morning News: April 5, 2022
  Eddy Elfenbein, April 5th, 2022 at 7:02 am

  EU to Propose Banning Russian Coal Imports After Atrocities

  How the Recoil From Russian Gas Is Scrambling World Markets

  Ukraine War Drives Countries to Embrace Renewable Energy—but Not Yet

  The $120 Billion Global Grain Trade Is Being Redrawn by Russia’s War in Ukraine

  Russian Auto Boomtown Grinds to Halt Over Ukraine Sanctions

  ‘Russia Is Half of Our Business.’ Or It Was.

  Treasury Stops Russia from Paying Debt Through U.S. Accounts

  The U.S. Economy Is Booming. So Why Are Economists Worrying About a Recession?

  Eyes on Inflation, Shoppers Cut Back on Staples

  As Global Economy Wavers, Even the Rich May Spend Less

  Manhattan Residential Real Estate Sales Hit A Record $7.3 Billion In The First Quarter

  Rags-to-Riches Stories Are Actually Kind of Disturbing

  He Quietly Turned Bank of America Around. Can He Do More?

  FTX US Invests in ‘Flash Boys’ Exchange in Crypto-Trading Push

  German Police Shut Down $1.3 Billion Illegal Darknet Firm

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• Musk Takes a Stake in Twitter
  Eddy Elfenbein, April 4th, 2022 at 10:55 am

  The stock market got a surprise today when Elon Musk announced he had taken a 9.2% stake in Twitter (TWTR). As I write this, shares of TWTR are up 24% in today’s trading.

  That’s a nice gig to be a well-known billionaire, buy a stake in a company and then announce what you bought and watch it soar in value.

  Twitter isn’t that large a company. Before today’s rally, its market value of $30 billion placed it at about the middle of the S&P 500. Twitter has 7,500 employees. That’s a lot, but it’s about one-twentieth of Google. It’s not really among the tech giants.

  In terms of Elon Musk’s wealth, this investment is pocket change. I’ll be curious to see if he pushes to make any changes in how the social media site is run. Previously, Musk had been vocal in his criticisms of Twitter.

  The announcement will be yet another major test for new Twitter CEO Parag Agrawal, who replaced Jack Dorsey after he unexpectedly resigned in November. Agrawal vowed to increase accountability, make decisions faster and to improve product execution. The company set ambitious goals for growth including increasing annual revenue to $7.5 billion and getting to 315 million daily users by the end of 2023.

  Musk posted a cryptic meme in December after Twitter announced that Agrawal was taking over from Dorsey as Twitter’s CEO. It depicted Agrawal as Soviet dictator Joseph Stalin and Dorsey as Soviet secret police head Nikolai Yezhov being shoved into water.

  I noticed that shares of WD-40 (WDFC) slid to a new 52-week low this morning. WDFC is getting close to a two-year low. I like to take notice when the stocks of good companies do poorly. Of course, no one is safe from the villain of over-valuation. An investment house downgraded it from neutral to underperform.

• Morning News: April 4, 2022
  Eddy Elfenbein, April 4th, 2022 at 7:06 am

  The Battery Metal Really Worrying China Is Lithium, Not Nickel

  Putin Reminds the World He Still Wields a Powerful Economic Weapon

  How the Recoil From Russian Gas Is Scrambling World Markets

  Turkey’s Trade Deficit Widens in March as Energy Imports Soar

  The Economic Shock Hitting the Housing Market Just Got Bigger

  JPMorgan’s Dimon Warns of Potential $1 Billion Loss from Russia Exposure

  Biotech Stocks, Once Booming, Enter Bear Territory

  How Two Best Friends Beat Amazon

  Elon Musk Takes 9.2% Stake in Twitter After Hinting at Shake-Up

  U.S. Credit Reporting Firms Aim to Magically Make Us Taller

  Starbucks Founder Schultz Suspends Share Buybacks on Return

  The Investor Who’s Sticking With Russia

  How One Man Helped Create a Nation of Investors

  How Bill Gross Built a Bond Empire — Then Lost It All

  Outdoor Dining Saved Restaurants, but Making It Permanent Is Complicated

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• Strong Jobs Report for March
  Eddy Elfenbein, April 1st, 2022 at 1:52 pm

  This morning, the government released the March jobs report. During the month, the U.S. economy created 431,000 net new jobs. Wall Street had been expecting 490,000. The numbers for January and February were revised higher as well.

  The unemployment rate fell to 3.6%. That’s another post-Covid low. It’s also lower than every single month from January 1970 through August 2019.

  The broader U-6 rate fell to 6.9%. That’s just 0.1% above the all-time low from 2019, although that series only goes back to 1994.

  The moves in the jobless metrics came as the labor force participation rate increased one-tenth of a percentage point to 62.4%, to within 1 point of its pre-pandemic level in February 2020. The labor force grew by 418,000 workers and is now within 174,000 of the pre-pandemic state.

  Average hourly earnings, a closely watched inflation metric, increased 0.4% on the month, in line with expectations. On a 12-month basis, pay rose nearly 5.6%, just above the estimate. The average work week, which figures into productivity, edged down by 0.1 hour to 34.6 hours.

  Also this morning, the ISM Manufacturing Index fell to 57.1. That’s an OK number. Wall Street had been expecting 59.0.

• Morning News: April 1, 2022
  Eddy Elfenbein, April 1st, 2022 at 7:04 am

  Euro Zone Inflation Hits Another Record High Of 7.5% As Russia-Ukraine War Pushes Up Energy Prices

  Thousands of Russia-Linked Ship Containers Pile Up in Rotterdam

  Ukrainian Factories Struggle as Russia’s Assault Rattles Supply Chains

  European Gas Buyers Navigate Russian Rouble Order as Supply Threat Eases

  U.K. Agrees to Join U.S. in Strategic Oil Reserves Release

  Russia Avoids Default Once Again As $447 Million Dollar Bond Payment Goes Through Even After Clearinghouse Blocks Account

  How to Endure the Big Decline in Bonds

  5-Year And 30-Year Treasury Yields Invert Again Ahead of Key Jobs Data

  The Dominance of Tech Stocks in S&P 500 Is Set to Shrink Next Year

  AMC, Other Meme Stocks Rally After GameStop’s Share-Split Plan

  China Weighs Giving U.S. Full Access to Audits of Most Firms

  March Jobs Report Could Reveal Strong Hiring Momentum

  Labor Groups Close in on Amazon in Two Tight Union Elections

  Toyota’s Hybrid Bet Vindicated by Big Gains in U.S. Market Share

  Ford, GM to Halt Production at Two Michigan Plants Due to Parts Shortage

  It’s Scary How Dominant Apple Has Become. But How Scary?

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