Archive for May, 2022

• CWS Market Review – May 31, 2022
  Eddy Elfenbein, May 31st, 2022 at 10:37 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. If you sign up today, you can see our two reports, “Your Handy Guide to Stock Orders” and “How Not to Get Screwed on Your Mortgage.”)

  The Bear May Not Be Finished

  Last week, the S&P 500 gained 6.6% for its best weekly gain in 18 months. That was welcome news, and it snapped a seven-week losing streak. Still, the odds are very high that this is yet another bear market rally.

  Unfortunately, this recent bump comes amid a poor overall market. In fact, this year is the worst start to a year, through 100 trading days, in 52 years. It’s the second-worst start in over 82 years (the fall of France was apparently not good for stocks).

  The truth is that bear market rallies are common. Investors will typically see several before the real rally begins. Is this latest rally just another head-fake? Probably, but there’s no way to be certain. In my experience, the stronger the bounce is, the less likely it is to last. As a rule, bear market rallies should be assumed to be phony until proven otherwise.

  Here’s an updated look at the S&P 500 High Beta Index (black) versus the S&P 500 Low Vol Index (blue).

  

  In plain English, the chart above is risky stocks against conservative stocks. As you can see, it’s been the risky stocks getting hammered while the conservative ones are barely scratched. This latest rally is focused almost exclusively among the risky stocks. That adds to my skepticism.

  The simple reality is that it’s hard for me to believe that the market has suddenly changed its outlook when all the previous problems are still there. At the top of the list, the U.S. economy still faces high inflation, and there’s little evidence that things are improving.

  Many Americans just celebrated the Memorial Day weekend while facing higher prices for food and gasoline. The highest inflation in four decades is leading the Federal Reserve to (finally) adopt an aggressive policy of raising interest rates. The recent minutes from the Fed made that clear.

  Investors should understand that higher interest rates are like kryptonite to stocks. Nearly every market rally has eventually been done in by the Federal Reserve.

  Here’s an example from the financial crisis:

  

  The Fed raised rates by 0.25% at 17 consecutive meetings. They overdid it and choked off first, the market and second, the economy.

  The Fed meets again in two weeks, and it seems highly likely that we’ll see another 0.5% rate increase. On top of that, there will probably be another 0.5% hike in late July. How high will rates go? I don’t know but I wouldn’t be surprised to see rates rise by 2% before the end of the year.

  Fed Governor Christopher Waller said yesterday that he expects to see the 0.5% rate hikes continue. Waller said he supports raising rates until they’re above the “neutral level.” This is the idea that there’s an ideal interest rate where all the parts of the economy come into perfect balance. The problem is that we don’t know exactly where this rate is. Recently, the Fed pinpointed the neutral rate at 2.5%. Still, that’s only a guess.

  We’re at an odd crossroads with the economy. Many of the numbers continue to look good, but the outlook for the near future is very pessimistic. I’ve never seen a gap this wide between economic reports and the outlook. The housing market is booming. The jobs market is on fire. Summer businesses are having trouble finding employees. (Hey guys, offer more!) There are now two job openings for every unemployed person. Yet everyone on Wall Street thinks we’re headed back to the 1970s.

  Another good example is the strength in corporate profits. In the S&P 500, 375 companies beat Wall Street’s earnings expectations for Q1. While many companies have reported trouble with supply-chain issues, they’re still experiencing strong demand.

  Last year was a very good year for corporate profits, and a large part of that was driven by wider profit margins. The problem with margin expansion is that there’s only so far you can push that. Now we’re seeing the pushback, and that’s what has stock traders so antsy.

  On Friday, the government said that consumer spending rose by 0.9% last month while after-tax income rose by 0.3%. Households set aside just 4.4% of their after-tax income. That’s the lowest rate since 2008.

  The government also updated the Q1 GDP report last week. The Bureau of Economic Analysis now says that the U.S. economy contracted by 1.5% during the first three months of this year. That’s 0.1% lower than the initial report. Don’t let the negative number fool you. Consumer spending was pretty good during the first quarter.

  With the income and spending report, the government also updates the personal consumption expenditure numbers. This is important to watch because it’s the Fed’s preferred measure for inflation. For the 12 months ending in April, core PCE rose by 4.9%. That’s down from the 12 months ending in March which was 5.2%. Headline PCE, which includes food and energy prices, rose by 6.3%. Over the last year, home prices were up more than 20%.

  On Friday, we’re going to get the jobs report for May. I expect to see more good numbers. Wall Street expects to see a gain of 325,000 nonfarm payrolls, and it is looking for the unemployment rate to fall to 3.5%. That’s a bold forecast but it’s reasonable. The weekly jobless claims numbers are still holding up well. The Federal Reserve recently conducted a survey on consumer health. It found that 78% of respondents say that they’re doing “at least OK.” That’s the highest result in the survey’s history.

  Stock Focus: Atrion

  I want to revisit Atrion (ATRI), which is a stock I’ve profiled before. Atrion is a great example of a niche company with an amazing track record, and barely anyone knows about them. Atrion makes products for the healthcare field for applications such as fluid delivery, cardiovascular and ophthalmology.

  These fluid delivery products include valves that hold and release precise amounts of fluids. This is crucial for areas like anesthesia and oncology. Do you wonder who makes valves for life vests? There’s a good chance it’s Atrion.

  Even though Atrion is small (about $1.1 billion in market cap), several of their most successful products are dominant in their market niches. For example, Atrion is a leading U.S. manufacturer of soft contact lens disinfection cases, clamps for IV sets, cardiac surgery vacuum relief valves, minimally invasive surgical tapes, check valves and balloon catheters for the treatment of tear duct blockages.

  The company currently has about 400,000 square feet of manufacturing and R&D capacity in three facilities in Alabama, Florida and Texas. Over the past five years, Atrion has steadily increased R&D funding by 5% per year. The firm has also invested $60 million in manufacturing and quality assurance equipment.

  Over the last 20 years, Atrion has averaged 6% sales growth and 18% growth in operating income. Most impressively, this growth has been organic, meaning it hasn’t come from acquisitions. Over the last 20 years, earnings-per-share has grown by an average of 20% per year. I also like that Atrion doesn’t have any debt.

  The stock has had an amazing run. Since 1990, shares of Atrion are up close to 300-fold. An investment of $10,000 would have grown to more than $2.9 million. Despite the amazing track record, shares of ATRI peaked at $948 in 2019. The stock is down about one-third since then.

  

  Best of all, not a single Wall Street analyst follows Atrion. I can’t say if the company has topped Wall Street’s expectations because there aren’t any expectations. Earlier this month, Atrion reported fiscal Q1 earnings of $4.71 per share. That’s an 18% increase over last year’s Q1.

  About the earnings, David Battat, Atrion’s president and CEO, said, “The three primary drivers of performance in the quarter were medical devices used in minimally invasive surgical procedures, consoles utilized in open heart surgeries, and components used to safely deliver therapeutics.”

  He added, “The substantial expansion of one of our manufacturing facilities remains on track for completion in the summer of 2023, which will support ongoing projects to increase the number of new product launches as well as the expansion of markets for existing ones.”

  Last year, Atrion’s sales rose about 11% and its EPS increased from $17.44 to $18.18. Atrion also increased its quarterly dividend from $1.75 to $1.95 per share. I’m expecting another dividend hike in August. This is a company that has rewarded its shareholders. Not only has Atrion consistently increased its dividend for 20 years, but the company has also paid out several generous special dividends.

  I can’t recommend Atrion just yet. I think the shares are still too expensive, but if Atrion dips another 20%, I would definitely be interested.

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

  – Eddy

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• Morning News: May 31, 2022
  Eddy Elfenbein, May 31st, 2022 at 7:08 am

  Why China Is Miles Ahead in a Pacific Race for Influence

  China’s Economic Downturn Shows Signs of Easing

  As China’s Private Developers Retreat, State-Backed Rivals Gain Ground

  Russia’s Gazprom Cuts Off Natural-Gas Supply to the Netherlands After the Dutch Refused to Pay in Rubles. Denmark Could Be Next

  Global Oil Refiners Falter in Efforts to Keep Up with Demand

  Oil Surge Fans Inflation Fears, Dampens Stocks

  Biden Pledges to Back Fed in Effort to Combat High Inflation

  Treasury Market Faces Liquidity Risks as Fed Pares Balance Sheet

  Wall Street’s Losing Streak Ends, but Uncertainty That Drove It Lingers

  After a Bumper 2021, Companies Might Struggle to Increase Profits

  States Help Business Owners Save Likely More Than $10 Billion in Federal Taxes

  Summer Worker Shortage Means Things Will Be Closed. Again.

  U.S. Wheat Crop Hit by Dry Winter then Soggy Spring, Adding to Global Tightness

  US Meat Prices Surge — Beef, Chicken Hit Record Highs on Memorial Day

  Unilever to Add Activist Investor Nelson Peltz to Board

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• Morning News: May 30, 2022
  Eddy Elfenbein, May 30th, 2022 at 8:09 am

  U.S. Retakes Top Spot in Supercomputer Race

  The Luna Cryptocurrency Has Been Resurrected After Its $40 Billion Collapse. It’s Already Crashing

  Treasury Releases Pandemic Funding for Small Businesses as They Face New Risks

  17 States Where Unemployment Is at Record Lows

  Safe As Houses? Rising Rates Test Foundations of Property Boom

  Russia Comes Up With a New Bond-Payment Plan to Avoid Default

  Europe’s Bid to Kick Russian Natural Gas Faces Opposition

  Companies Rush to Cash In on EPA Rules for Capturing Methane Emissions

  Hit Hard by High Energy Costs, Hawaii Looks to the Sun

  EVs Proliferate, While Charging Stations Lag Behind

  Bottleneck Fuels Record-High Gas Prices

  Illegal Immigration Is Down, Changing the Face of California Farms

  The Texas Law That Has Banks Saying They Don’t ‘Discriminate’ Against Guns

  Activist Investing Has Come for Fossil Fuels. What About Guns?

  Can Paramount Go It Alone?

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• Morning News: May 27, 2022
  Eddy Elfenbein, May 27th, 2022 at 7:02 am

  I Watched Russia Join The World’s Markets. Now It All Feels Like an Illusion

  Digital Dollar Could Coexist With Stablecoins, Fed Vice Chairwoman Says

  Dip Buyers Storm Back to Stocks After Selloff

  A New Prediction Market Lets Investors Bet Big on Almost Anything

  How Influencers Hype Crypto, Without Disclosing Their Financial Ties

  ESG Haters Think Climate Investors Are Controlling Everything. If Only

  Britain Will Tax Oil and Gas Profits as Cost-of-Living Crisis Swells

  American Shoppers Boost Retailers With Spending on Work Clothes, Discount Staples

  When the Best Available Home Is the One You Already Have

  Apple Supplier Faces Worker Revolt in Locked Down China Factory

  Broadcom to Acquire VMware in $61 Billion Enterprise Computing Deal

  ‘Top Gun: Maverick’ Loses Chinese Investor Due to Pro-U.S. Messaging

  China Excels in Google Rankings on Xinjiang and Covid-19 Searches

  ‘Escalation of Secrecy’: Global Brands Seek Clarity on Xinjiang

  Accounting Firm EY Considers Split of Audit, Advisory Businesses

  Full House: American Casino Development Has Hit Its Saturation Point

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• Morning News: May 26, 2022
  Eddy Elfenbein, May 26th, 2022 at 7:08 am

  Russia’s Central Bank Cuts Key Interest Rate To 11%, Citing Decreased Stability Risks

  Fed Minutes Show Urgency for Raising Rates to Tame High Inflation

  CBO Projects Inflation, Economic Growth to Cool This Year and Next

  SEC Proposes More Disclosure Requirements for ESG Funds

  Sequoia Capital Warns Founders After ‘Crucible Moment’

  The Tech Rout Isn’t Just Cyclical—It’s Well-Earned, and Overdue

  Twitter’s Chief Tries Staying the Course as Elon Musk Upends Plans

  Rescinded Twitter Job Offer Points to Turmoil at the Company

  Twitter is Fined $150 Million in Privacy Settlement, as Elon Musk Commits More Equity to Fund Deal

  Apple to Keep iPhone Production Flat as Market Grows Tougher

  Apple Boosting Pay Budget for Workers Amid Tight Labor Market

  South Korean Workers Turn the Tables on Their Bad Bosses

  ‘Quantum Internet’ Inches Closer With Advance in Data Teleportation

  Gen Zers Are Buying Homes. Here’s Where They’re Looking

  Macy’s Raises Annual Profit Outlook as Party-Wear Demand Rebounds

  The Ice Cream Choice Is Endless, but We All Get the Same Cone

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• The Latest Fed Minutes
  Eddy Elfenbein, May 25th, 2022 at 3:18 pm

  This afternoon, the Federal Reserve released the minutes from its meeting held earlier this month. The minutes showed that the Fed is looking at making three more rate hikes over the next few months. Some Fed members said they think inflation may be cooling off, but it’s too early to say that inflation has peaked.

  From the minutes:

  In their consideration of the appropriate stance of monetary policy, all participants concurred that the U.S. economy was very strong, the labor market was extremely tight, and inflation was very high and well above the Committee’s 2 percent inflation objective. Against this backdrop, all participants agreed that it was appropriate to raise the target range for the federal funds rate 50 basis points at this meeting. They further anticipated that ongoing increases in the target range for the federal funds rate would be warranted to achieve the Committee’s objectives.

  I’ve been critical of the Fed because I believe it was slow to react to inflation, even as the evidence became clear. These minutes tell me that the Fed is starting to realize that inflation is a problem. Still, I want to see more action rather than rhetoric.

• Median Rent Could Hit $2,000 Soon
  Eddy Elfenbein, May 25th, 2022 at 12:03 pm

  The stock market is up today. At noon, the S&P 500 is up by about 0.44%. That’s not bad. High Beta stocks are doing very well while the Low Beta sector is mostly flat.

  Some travel stocks have been getting knocked around. Royal Caribbean (RCL), Norwegian Cruise Line (NCLH), MGM (MGM) and Expedia (EXPE) all hit new 52-week lows, and Carnival is very close.

  I will cautiously point out that Ross Stores (ROST) has made back a lot of lost ground. Today’s high for Ross was 18% above Friday’s intra-day low.

  This morning’s report on durable goods showed an increase of 0.4%. The figure for March was revised down to a gain of 0.6%. MarketWatch said that the national median rent could hit $2,000 very soon.

  Stay tuned. At 2 pm, the Fed will release the minutes from its last meeting.

• Morning News: May 25, 2022
  Eddy Elfenbein, May 25th, 2022 at 7:08 am

  Global Crises Threaten Economic ‘Perfect Storm’: Davos Update

  Export Curbs Spread Globally, Adding to Food-Inflation Pressures

  Russia to Service Dollar Debt in Rubles After US Closes Loophole

  Russia Will Start a Pilot Project for ‘Digital’ Rouble from April

  One Man Helped Credit Suisse Make Billions From Russia Tycoons

  Germany Plans to Keep Coal-Fired Plants Ready In Case Russian Gas Is Cut

  Why Has the Inflation Calculation Changed Over Time?

  California Gas Prices in Some Areas Are Higher than Federal Minimum Wage

  New-Home Sales in April See Biggest Monthly Drop Since 2013

  Fed Searches for the Magic Number to Cool a Red Hot Housing Market

  Hedge Funds Brace for $20 Billion of Redemptions, Citco Says

  The Commodities Giant Glencore Will Pay $1.1 Billion to Settle Bribery and Price-Fixing Charges

  Stellantis and Samsung to Spend $2.5 Billion on an Electric Vehicle Battery Plant in Indiana

  Pfizer to Sell Vaccines, Drugs at Low Prices to Poorer Countries

  McDonald’s Poised to Retain Both Seats in Proxy Fight With Carl Icahn

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• CWS Market Review – May 24, 2022
  Eddy Elfenbein, May 24th, 2022 at 7:51 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. If you sign up today, you can see our two reports, “Your Handy Guide to Stock Orders” and “How Not to Get Screwed on Your Mortgage.”)

  Snap, Crackles and Pops

  Last week, it was retail. This week, it’s social media. Today was an exceptionally brutal day for social media stocks. Shares of Snap (SNAP) fell over 43%. In a regulatory filing, the owner of Snapchat said, “the macroeconomic environment has deteriorated further and faster than anticipated.”

  Hmm. I’m not sure if the problem stems from the macroeconomy or the simple fact that Snapchat isn’t as popular as TikTok.

  The Snap news was enough to bring down a few other social media stocks. Shares of Facebook, or more formally, Meta Platforms (FB), fell by 7.6%. The stock still hasn’t recovered from the super-atomic wedgie it got two months ago. Google, formally called Alphabet Inc., (GOOGL) also got caught up in the selling. Shares of GOOGL dropped 5% today. Pinterest (PINS) lost 23%.

  

  During today’s trading, shares of Twitter (TWTR) got as low as $35.40. Elon Musk’s offer price is now more than 50% higher than Twitter’s current share price. I think that’s a clear sign that the Musk deal ain’t gonna happen. You’ve heard of people “voting with their feet.” This is people voting with their sell orders.

  I feel as if I’m committing some terrible social faux pas by mentioning something as archaic as actual business metrics, but someone needs to point out that Snap is not very profitable, nor has it been very profitable and it may never make a sustainable profit.

  Don’t take my word for it. It literally says that in the company’s prospectus. To wit:

  “We have incurred operating losses in the past, expect to incur operating losses in the future, and may never achieve or maintain profitability.”

  (Don’t believe me? See this link, page 6.)

  I hate to say it, but that line probably turned out to be the most accurate statement ever put out by Snap. To be fair, Snap has had some positive quarters, but nothing impressive. Now they’re saying that things look worse than before. This comes on top of a previous warning last month that inflation and supply-chain issues were weighing on the company’s profitability.

  How Long Will the Lousy Market Last?

  On Thursday, the S&P 500 closed at a 14-month low. Measured from the highest closing level from January 3, the index lost 18.7%.

  The market went even lower during the day on Friday, but thanks to a late-day rally, the S&P 500 closed a tad higher on the day, but going by the intra-day numbers, the S&P 500 had lost 20.9% from its peak.

  How much lower can we go?

  The true answer is that I have no idea, nor do I much care. But I will lay out a few facts about bear markets.

  The most important is that bear markets happen. They always have and always will. Statistically, bears come around about once every four years. That seems about the length of Wall Street’s memory.

  The second fact is that bear markets tend to be very short. Even if the peak to trough lasts several months, the worst damage is often concentrated to a few weeks. Sometimes, a few days.

  

  Importantly, bear markets are not felt evenly. Typically, the worst declines strike the sectors that had the biggest gains during the run-up. We’re certainly seeing that now. In fact, the Nasdaq peaked in November, a few weeks before the overall market peaked.

  On the whole, our Buy List stocks have held up much better than the rest of the market, and that includes our big losers like Ross Stores (ROST) and Trex (TREX). In most any portfolio, you’re going to have some laggards – that’s why diversification helps.

  Bear markets often have several false starts. Don’t get too excited about big one-day rallies. Usually, the bigger they are, the more likely they are to be fakes. I even mentioned that to you in late March after the market had a nice run-up: “I’ve been a doubter of this rally nearly since Day #1. It’s moved too fast, too soon, and it’s been too concentrated in higher-risk stocks.” That turned out to be the day of the market’s near-term peak.

  In this case, I was mostly lucky, but be wary of bulls bearing gifts.

  Perhaps the best lesson of bear markets is that this is when you see a lot of bargains. You simply have to be patient. I reserve the best ideas for our premium letter, but I will pass along the opportunity in Silgan Holdings (SLGN). This is a company that’s not very well known, which is how I like it.

  

  Silgan is one of the world’s leading makers of metal cans and consumer packaging. The company employs over 15,000 people. Last month, Silgan said it made 78 cents per share for Q1. That was two cents better than estimates. CEO Adam Greenlee said, “Revenues grew significantly in each of our businesses as we successfully passed through raw-material and other cost inflation to the market.”

  Business is going so well that Silgan raised its full-year guidance range to $3.90 to $4.05 per share. The previous range was $3.80 to $4.00 per share. In February, the company bumped up its quarterly dividend from 14 to 16 cents per share.

  Don’t overlook these quiet stocks. They can be very profitable. The shares have trended lower over the last few weeks. Going by the company’s own guidance, shares of Silgan are going for a little over 10 times this year’s earnings estimate. Plus, the dividend yields about 1.5%.

  Shout Out for Medical Devices Stocks

  I also wanted to highlight one of my favorite investment sectors. That sector is medical device stocks. This is a great area to find strong investments. Some of my favorites in this field include Abbott Labs (ABT), Stryker (SYK), Edwards Lifesciences (EW), Medtronic (MDT) and Zimmer Biomet (ZBH).

  This sector brings together several characteristics that make for promising investments. For one, the healthcare industry is massive. There are continuous innovations. The sector is heavily backed by the government. For established companies, the earnings growth tends to be very stable. That’s an underrated feature of many outstanding stocks.

  Here’s a good example. The orange line shows the earnings growth line of Stryker. Note how steady the increases have been:

  

  At this resolution, the numbers are a bit blurry, but you can see the consistency of Stryker’s earnings.

  Another good feature about this sector is that it hasn’t done terribly well lately. I always pay attention when good stocks or sectors are lagging.

  Here’s a look at the iShares U.S. Medical Devices ETF (IHI):

  

  Again, notice how consistent the price gains have been. You can also see that any break from the long-term trend, as we’re having now, has been a good time to buy.

  Some of the fund’s top holdings are Abbott Laboratories (ABT), Thermo Fisher Scientific (TMO), Danaher (DHR), Medtronic (MDT), Intuitive Surgical (ISRG), Edwards Lifesciences (EW), Stryker (SYK), Becton Dickinson (BDX), Boston Scientific (BSX) and IDEXX Labs (IDXX). You can probably tell I’m a fan of this sector because so many of these names have been or are currently on our Buy List.

  The stock market will be closed on Monday for Memorial Day. Memorial Day is a fairly new holiday for the NYSE. The first time trading was closed for Memorial Day was in 1971.

  The last Memorial Day when the market was open was May 25, 1970. That was in the middle of a nasty bear market, the worst since the great depression. The market bottomed the next day. The Dow has lost 35% in a year.

  The losses were even greater than the indexes suggest because they were huge losses in over-the-counter securities. That led to the Nasdaq being founded the following year. If you were ever curious, the Nasdaq Composite started life at 100.00 on February 5, 1971. It’s outlasted several bear markets and so will we.

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

  – Eddy

• Snap Drops 40%
  Eddy Elfenbein, May 24th, 2022 at 12:17 pm

  The stock market is down again around noontime. One thing to note is that volatility has chilled out in a major way. I probably shouldn’t declare victory just yet, but we haven’t had the kind of intra-reversals that we had previously.

  Shares of Snap (SNAP) are down over 40% today. Facebook, I mean Meta Platforms (FB), is off by 9% and Google (GOOGL) is down 6%. Amazon and Target both hit new 52-week lows.

  Heico (HEI) is just about flat today after a very good earnings report. I suppose being flat is a good thing when the markets are down close to 2%.