Archive for May, 2022

• JetBlue Goes Hostile for Spirit
  Eddy Elfenbein, May 16th, 2022 at 10:47 am

  The stock market has started the week on a down note but it’s not too severe. In fact, I think there’s a good chance the market will be positive before the closing bell.

  Many retailers are set to report their earnings this week. Home Depot and Walmart report tomorrow.

  One interesting story is that JetBlue Airways has launched a hostile takeover bid of Spirit Airlines. They had offered $33 per share but Spirit turned it down in order to merge with Frontier Airlines.

  JetBlue has said acquiring Spirit would give it access to a large fleet of Airbus planes, trained pilots and the ability to better compete against the “Big Four” U.S. airlines that control most of the U.S. market. Spirit rejected the offer to stick with a planned $2.9 billion-cash-and-stock deal to merge with fellow discounter Frontier Airlines. Those two airlines say a merger would allow them to grow and compete more easily.

  JetBlue on Monday offered Spirit shareholders $30 a share and encouraged them to vote against the Frontier deal during a June 10 shareholder meeting. The company also said its earlier offer of $33 per share is still on the table if Spirit decides to negotiate. Spirit’s shares closed Friday at $16.98.

  Lloyd Blankfein, the former CEO of Goldman Sachs, said there’s a ‘very, very high risk’ of recession.

• Morning News: May 16, 2022
  Eddy Elfenbein, May 16th, 2022 at 7:01 am

  Yellen Looks to Get Global Tax Deal Back on Track During Europe Trip

  Ben Bernanke Predicts ‘Stagflation’ Reminiscent of the 1970s

  How Do Higher Interest Rates Bring Down Inflation?

  Meet the Hedge-Fund Manager Who Warned of Terra’s $60 Billion Implosion

  China’s Economic Activity Collapses Under Xi’s Covid Zero Policy

  Saudi Aramco Posts Record Quarterly Profit on Surging Oil Prices

  America Leans on Aging Power Plants to Keep the Lights On

  McDonald’s to Quit Russia in Sign of Country’s Growing Isolation

  Renault Agrees to Sell Its Stake in a Russian Automaker

  Turkey’s FLO In Talks to Take Over Reebok’s Stores in Russia

  JetBlue Launches Hostile Takeover Bid for Spirit Airlines

  The Tesla Effect: Snowmobiles, Boats and Mowers Go Electric

  The Great London Property Exodus Is in Reverse as Tenants Return

  Walmart Woos College Grads With $210,000 Future as Store Bosses

  Goldman Sachs Allows Senior Staff to Take Unlimited Vacation

  Pay Packages for CEOs Rise to Record Level

  The Rich Are Not Who We Think They Are. And Happiness Is Not What We Think It Is, Either

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• Twitter Acquisition “On Hold”
  Eddy Elfenbein, May 13th, 2022 at 11:23 am

  The stock market is having a big counter-trend rally today. That means that all the stuff that had been doing poorly is doing well, and the stuff that had been doing well is not having a good day. The S&P 500 is up more than 2% as I write this.
  Shares of Twitter are down sharply after Elon Musk tweeted that his takeover of Twitter is temporarily on hold due to concerns over spam. The stock has been as low as $40.01 today. Remember, the buyout price is $54.20 per share.

  In an interview yesterday, Jerome Powell said that two 0.5% hikes are likely:

  “If the economy performs about as expected,” Powell said, “it would be appropriate for there to be additional 50-basis point increases at the next two meetings.”

  Powell was also confirmed by the U.S. for another four-year term as Fed Chairman.

• Morning News: May 13, 2022
  Eddy Elfenbein, May 13th, 2022 at 7:02 am

  Russian Shipping Traffic Remains Strong as Sanctions Take Time to Bite

  Russian Tanker Giant in Deals to Sell Ships Amid Western Sanctions

  World Stocks Clamber Off 18-Month Lows, But Markets on Recession Watch

  Fed Chair Says Bringing Inflation Down Will Take ‘Some Pain’

  Cryptocurrencies Melt Down in a ‘Perfect Storm’ of Fear and Panic

  BofA Strategists Say Investor Exodus Signals ‘True Capitulation’

  What BlackRock, Vanguard and State Street Are Doing to the Economy

  Global Diamond Trade Fractures Under the Weight of Russia Sanctions

  Where Is Guinea’s Gold? A London Laundering Case May Hold Clues

  All of Those Quitters? They’re at Work

  Elon Musk Says Twitter Deal Is on Hold, Sending Shares Lower Premarket

  Tesla Puts India Entry Plan on Hold After Deadlock on Tariffs

  Baby Formula Shortage Could Leave Parents Scrambling for Months

  Inside the Collapse of CNN+, the News Channel’s ‘Apollo Mission’

  Pod People: Home in Pricey Bay Area Will Rent Bunk Beds for $800 a Month

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• Morning News: May 12, 2022
  Eddy Elfenbein, May 12th, 2022 at 7:01 am

  Europe Refiners Benefit from U.S. Emergency Oil Stock Releases

  US Budget Deficit Shrinks $1.6 Trillion on Record Tax Surge

  Inflation Is Headed Lower—But Maybe Not Low Enough

  Consumer Prices Are Still Climbing Rapidly

  Bitcoin Is Increasingly Acting Like Just Another Tech Stock

  More Than $200 Billion Wiped Off Cryptocurrency Market in a Day

  SoftBank’s Son Pays Price for Tech Bets With $20 Billion Loss

  Oil Giant Saudi Aramco Is Now the World’s Most Valuable Company, Bumping Apple from The Top Spot

  Social-Media Regulations Expand Globally as Elon Musk Plans Twitter Takeover

  SEC Probes Musk’s Twitter File Lag

  Disney Reports Jump in Disney+ Subscribers in Latest Quarter

  Disney Path to Subscriber Success Is Outside U.S.; Way to Profit Less Clear

  Starbucks Baristas Are Unionizing, and Even Howard Schultz Can’t Make Them Stop

  A Union Blitzed Starbucks. At Amazon, It’s a Slog.

  Mary Barra’s ‘Long Game’: Winning the E.V. Race

  Beyond Meat’s Stock Slides 20% On Weak Sales, Heads Lower Than IPO Price for First Time

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• The April CPI Report
  Eddy Elfenbein, May 11th, 2022 at 9:55 am

  The inflation report for April came out this morning and it showed that inflation still plagues the U.S. economy. For the month of April, consumer prices rose by 0.33%. That’s the lowest since August 2021. Over the last year, consumer prices are up 8.22%. That’s down some from the 12-month figure ending in March.

  The drop in gasoline helped a lot last month.

  The price gains also meant that workers continued to lose ground. Real wages adjusted for inflation decreased 0.1% on the month despite a nominal increase of 0.3% in average hourly earnings. Over the past year, real earnings have dropped 2.6% even though average hourly earnings are up 5.5%.

  (…)

  The CPI gains came even though energy prices declined 2.7% for the month, including a 6.1% drop for gasoline. The BLS food index rose 0.9% in April, countering the deceleration in energy. On a 12-month basis, energy costs were still up 30.3% while food rose 9.4%, according to unadjusted data. Gasoline costs at the pump this week reached their highest level ever not adjusted for inflation.

  Core inflation rose by 0.57% last month. That’s pretty much in line with the last few months. The 12-month increase to core inflation is now at 6.13%.

  Airline fares continued their climb as more people take to the skies amid increased business travel and vacations. Prices rose 18.6% on the month and are up, according to unadjusted data, 33.3% over the past year.

  Auto sales also have been a big contributor to inflation as supply chain issues, especially with the semiconductors vital to vehicle operating systems, have pushed prices up. Used vehicle prices fell 0.4% on the month but new vehicle prices rose 1.1%. Prices rose 22.7% and 13.2% for the two categories respectively over the past year.

  April also saw big price increases across selected food areas. Chicken was up 3.4% and eggs surged 10.3% amid a bird flu scare, while Bacon rose 2.5% and breakfast cereal was up 2.4% Ham prices fell 1.8%.

• Morning News: May 11, 2022
  Eddy Elfenbein, May 11th, 2022 at 7:03 am

  War and Weather Sent Food Prices Soaring. Now, China’s Harvest Is Uncertain.

  Diamond Prices Are Spiking and Even De Beers Can’t Fill the Gap

  The Dollar Problem: Emerging Markets Count the Costs

  Economists Estimate Rapid Pace of U.S. Inflation Eased in April

  Americans Planning Summer Travel Face a New Hurdle: High Inflation

  Fed Confronts Why It May Have Acted Too Slowly on Inflation

  Lisa Cook is Confirmed as a New Fed Governor

  Fear and Loathing Return to Tech Start-Ups

  TerraUSD Stablecoin Plunges as Crypto Market Awaits Rescue

  BlackRock’s $100 Million Star Trader Turns Bearish Amid Record Losses

  Allianz Hit From Hedge Fund Implosion Reaches $5.9 Billion

  Bolt Built $11 Billion Payment Business on Inflated Metrics and Eager Investors

  Swedish Match Agrees to $16 Billion Takeover by Philip Morris

  Twitter Ad Business Could Surge as Advertisers Pin Hope on Musk

  Netflix Tells Employees Ads May Come by the End of 2022

  NBA Teams Hike Ticket Prices as Attendance Drops, Internal Data Shows

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• CWS Market Review – May 10, 2022
  Eddy Elfenbein, May 10th, 2022 at 7:06 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.”)

  Yesterday, for the first time ever, the nominal price of the Advisor Shares Focused Equity ETF (CWS) closed above the nominal price of the Ark Innovation ETF (ARKK). The former is the ETF that’s based on our Buy List and the latter is the popular ETF run by Cathie Wood.

  

  That’s a massive change of course in a short amount of time. Fifteen months ago, each share of ARKK was going for about four times each share of CWS. Now we’re slightly more.

  I don’t point this out to gloat. I’m a fan and admirer of Wood’s. Rather, I do this to show the incredible dynamics underlying the current stock market.

  Don’t Mistake Rotation for Brains

  Wood’s style of investing is what’s called “factor riding.” She invested in nearly every high momentum stock and held on during a period when those stocks were very popular. Shares of ARKK exploded higher (the red line in the chart above).

  That’s the easy part of factor riding. The problem is when the market turns against you. If your factor is out of style, the market can be merciless as it has been recently. Whenever you hear of easy and quick gains in the stock market, you can usually assume that the person is somehow engaged in factor riding.

  Meanwhile, our style of investing is far more conservative and diversified. That’s why we lagged ARKK before and are leading it now.

  So much of Wall Street is governed by which sectors are hot and which are not. Too often, investors mistake simple rotations for brains. Wall Street loves to jump from one shiny plaything to the next; “to everything there is a season.”

  Yesterday was a terrible day for the stock market, and that came on top of a dismal market. In last week’s issue, I mentioned that the S&P 500 is off to its worst start for the year in 83 years. For the third time in seven sessions, the S&P 500 fell by more than 3%. On Monday, the S&P 500 closed below 4,000 for the first time since March 2021. We closed a hair above it today.

  The S&P 500 peaked on January 3, the first trading day of the year. Official bear markets are typically defined as drawdowns of 20% or more. That means we’ve hit bear territory if the S&P 500 closes below 3,837.25. Today’s low was 3,969.07. Hold on, because we may test the bear level soon.

  As bad as the S&P 500 has been, the Nasdaq has been doing even worse. The Nasdaq Composite fell 4.29% on Monday. By the closing bell, the index was down 27.61% from its November high close. The Nasdaq is already in a bear market.

  Investors need to understand that the market’s rotation is largely related to the Fed’s interest-rate policy. As the Fed has raised rates in response to inflation, the riskier areas of the market have been severely punished. Meanwhile the more conservative sectors are down, but not nearly as much.

  Here’s an update to a chart I ran last week of the S&P 500 Growth versus S&P 500 Value ETFs. You can see just how badly growth stocks have lagged.

  

  Here’s another chart that I think shows a lot. This is the Nasdaq Composite compared with bitcoin.

  

  The correlation isn’t super high, but there’s something there.

  Why is this important? That’s because it shows how the market is treating all risky assets, even fairly disparate ones, as if they’re nearly the same. It’s as if the market is placing everything in one of two boxes. One is labeled “risky stuff” and the other is “everything else.”

  Everything else is winning.

  Last Wednesday, not long after I sent you last week’s issue, the Federal Reserve raised interest rates by 0.5%. There was no surprise there, and the market briefly rallied. On Friday, the market gave it another think and decided it wasn’t happy.

  Markets don’t like higher rates. Even though rates aren’t that high yet, the impact is being felt. This is probably the first in a string of 0.5% rate increases. For a time, the market had been expecting a 0.75% increase at the June meeting. However, Fed Chairman Jerome Powell said that the Fed hasn’t been discussing a rate hike that large.

  Nearly everything that happens in the stock market is a shadow of what’s going on with interest rates. That’s why the bond and currency markets are adjusting as well. The U.S. Dollar Index recently reached a 20-year high. As always, capital goes where it’s treated best. The yield on the 10-year Treasury recently closed above 3%. Both the 5- and 7-year have as well.

  Here’s something interesting: The yield on the 7-year TIPs finally closed above 0%. These are Treasury Inflation-Protected securities which means the return is adjusted for inflation. Two months ago, the same yield was going for -1.33%. The message is that everyone is expecting higher rates. As long as there’s inflation, we’re going to see rates under pressure.

  

  Speaking of which, the next inflation report comes out tomorrow, and it’s been inflation that’s finally woken the Fed up to the damage that it has done. I expect to see another report showing high inflation, although it’s possible that the core inflation number may come in light. The sad fact is that the Fed doesn’t have a good track record of fighting inflation without causing a recession. That’s why so many traders are on edge.

  By the way, May panics aren’t unheard of on Wall Street. The Panic of 1837 lasted from May 8 to May 12. Back then, things got so out of hand that at one point, the New York militia had to be called to Wall Street. The effects of the panic didn’t subside for another seven years.

  The Panic of 1893 started on May 1 and lasted until May 5. That year, over 600 banks went under. There wasn’t any relief until gold was discovered in the Klondike. In other words, the money supply increased.

  While it wasn’t a traditional panic, 82 years ago today was probably the most important day of the 20th century. Germany invaded France, Chamberlain resigned, and Winston Churchill became prime minister. That day the Dow fell 3.4 points, or 2.3%. From May 9 to May 21, the Dow lost 23%.

  During all those panics, the selling fervor eventually subsided; it just took time. The same will happen this time. One of my favorite market quotes is from Shelby Cullom Davis: “You make most of your money in a bear market; you just don’t realize it at the time.”

  Trex Beats the Street

  Investors tend to talk about their big winners and ignore their losers. Well today I want to talk about my biggest loser this year, and that’s Trex (TREX), the deck company.

  Through Tuesday, Trex is down by more than half. If Trex magically jumped 50% tomorrow, it would still be our worst-performing stock this year.

  

  Why am I talking about my disaster with this stock? That’s because I still like it. In fact, I think it’s going for a very good value right now.

  It’s no mystery why Trex is down so much. It’s being lumped in with the housing market and the market is worried about higher mortgage rates wrecking Trex’s business.

  For now, the evidence is that business is going very well. On Monday, Trex released a very good earnings report. (No, they weren’t beating lowered guidance. That’s a favorite trick on Wall Street.) The deck company reported Q1 earnings of 62 cents per share. That’s an increase of 48% over last year, and it was eight cents higher than expectations.

  Quarterly sales rose 38% to $339 million. That was above the company’s own guidance of $320 to $330 million.

  The CEO said:

  “2022 is off to a strong start with Trex Residential posting 40% revenue growth, reflecting a double-digit increase in volume from strong secular trends, as homeowners continue to invest in existing residences and pursue renovations that enhance their outdoor living spaces. Price increases to address inflationary pressures were absorbed by the market and also benefitted net sales. As the category leader with newly expanded capacity, we believe that Trex is capturing more than its share of the ongoing conversion from wood to composite products,” said Bryan Fairbanks, President and CEO.

  For Q2, Trex expects sales to range between $375 million to $385 million. At the midpoint, that’s an increase of 22%. For all of 2022, Trex expects double-digit revenue growth.

  Trex rose more than 5% today. I can’t say that the rout in the stock is over, but the stock is down and business is going well. The market can’t ignore that forever. It’s not easy to stick with a stock that’s caused so much pain, but investing isn’t about emotions. I’m standing by Trex. By the way, if you want to know more about our Buy List stocks and what I think about them please sign up for our premium Substack. We just had a great earnings season.

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

  – Eddy

  P.S. You can get more info on our ETF here.

• Reynolds Earns 26 Cents per Share
  Eddy Elfenbein, May 10th, 2022 at 11:38 am

  The stock market is down again today after being up shortly after the opening bell. Thanks to yesterday’s blow-out earnings report, shares of Trex (TREX) were up as much as 15% today but it’s given back most of those gains.

  We had our final earnings report of this season. Reynolds Consumer Products (REYN) reported earnings of 26 cents per share which matched expectations. Revenues were up 12% to $845 million.

  “We continue growing share in most of our categories and began 2022 with another solid quarter demonstrating our commitment to price leadership,” said Lance Mitchell, President and Chief Executive Officer. “We are innovating and investing in our categories while also recovering profitability in a dynamic environment. I remain exceptionally proud of the RCP team and see tremendous potential for our business.”

  For guidance, Reynolds said it expects earnings to be at the low end of its 2022 guidance range of $1.56 to $1.70 per share. Reynolds is up about 3% in today’s trading.

  The next big market news will be tomorrow morning’s CPI report.

• Morning News: May 10, 2022
  Eddy Elfenbein, May 10th, 2022 at 7:11 am

  OPEC Kingpins Sound Alarm Over World’s Dwindling Energy Capacity

  Japan Has Long Sought More Inflation and a Weak Yen. But Not Like This.

  The Front Line of the U.S.-China Cold War Slices Through Japan

  Stock Market’s Plunge Continues on New Concerns About Global Economy

  Cathie Wood’s Famed Market-Beating Return Is Disappearing

  States Turn to Tax Cuts as Inflation Stays Hot

  For Tens of Millions of Americans, the Good Times Are Right Now

  Housing Supply Is Finally Improving, As High Prices And Rising Rates Weigh On Sales

  Apple’s China Engineers Keep Products Flowing as Covid Shuts Out U.S. Staff

  Truckers Want More Trucks Than Industry Can Build

  Pfizer to Buy Migraine Drugmaker Biohaven in $11.6-Billion Deal

  Philip Morris International in Talks to Buy European Smokeless-Tobacco Rival

  Meta’s First Store Aims to Lure Consumers to The Metaverse

  Tyson Foods Profits Soar as Meat Prices Climb

  Rivian Stock Slumped. Ford Plans to Sell Part of Its Stake.

  Warhol’s ‘Marilyn,’ at $195 Million, Shatters Auction Record for an American Artist

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