Archive for May, 2022

• The S&P 500 Drops Below 4,000
  Eddy Elfenbein, May 9th, 2022 at 5:33 pm

  Today was another tough day for the stock market. The S&P 500 fell 3.20%. That was its third 3% down day in the last seven days. The index is now down 16.79% from its closing high on January 3 of this year. The S&P 500 closed below 4,000 for the first time since March 2021.

  Once again, the Nasdaq had an even worse day. The Nasdaq Composite fell 4.29% today. The index is now down 27.61% from its November high close. The S&P 500 Energy Sector was the big loser. It lost 8.3% today.

  The defensive sectors did well today. On our Buy List, Church & Dwight (CHD) gained 2.75% today. Overall, our Buy List had a good relative performance day, meaning down but not by as much. For the day, our Buy List lost 1.97% today.

  After the closing bell, Trex (TREX) 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.

  Sales rose 38% to $339 million. That was above the company’s guidance of $320 to $330 million. This was a very good quarter, and it may bring the shares some much-needed relief.

  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.

• Morning News: May 9, 2022
  Eddy Elfenbein, May 9th, 2022 at 7:00 am

  The Woman Steering Russia’s War Economy

  Seizing an Oligarch’s Assets Is One Thing. Giving Them to Ukraine Is Another.

  China Remains an Outlier in a World of Surging Inflation

  Britain’s Biggest Bank Is Caught in the U.S.-China Crossfire

  Pentagon’s China Warning Prompts Calls to Vet U.S. Funding of Startups

  The Biden Administration Is Capping the Cost of Internet for Low-Income Americans

  Electricity Shortage Warnings Grow Across U.S.

  Contra Simpleton Pundits, ‘the Fed’ Didn’t Cause the Stock-Market Correction

  Everything That Could Go Wrong in Markets as Free-Money Era Ends

  Megacap Optimists Buckle Under Weight of Bear Market

  Bitcoin Flirts With Lowest Level Since 2021 as Equities Drop

  Crypto Critic Nouriel Roubini Is Working on a Tokenized Dollar Replacement

  The Tech Industry’s Epic Two-Year Run Sputters

  Ikea To Spend 3 Billion Euros On Stores As It Adapts To E-Commerce

  Taking On Fast Fashion by Taking It Down

  They Came, They Hiked, They Stayed: Retirees Lift Fortunes in Rural America

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• The April Jobs Report
  Eddy Elfenbein, May 6th, 2022 at 10:24 am

  This morning, the government said that the U.S. economy created 428,000 net new jobs last month. That was a little higher than expectations. The unemployment rate stayed at 3.6%. Wages rose by 0.3% and are now up 5.5% over the last 12 months which is below the rate of inflation. There are now 99 million Americans not in the labor force.

  An alternative measure of unemployment that includes discouraged workers and those holding part-time jobs for economic reasons, sometimes referred to as the “real” unemployment rate, edged higher to 7%. Unemployment for Blacks has showed a steady decline and fell again, to 5.9%, while Hispanic unemployment dropped to 4.1%.

  “The job market continues to plow forward, buoyed by strong employer demand. After just over two years of the pandemic, the job market is remaining resilient and on track for a return to pre-pandemic levels this summer,” said Daniel Zhao, senior economist at jobs review site Glassdoor. “However, the job market is showing some signs of cooling as it turns the corner and the recovery enters a new phase.”

  The labor force participation rate, a key measure of worker engagement, fell 0.2 percentage points for the month to 62.2%, the first monthly decline since March 2021 as the labor force contracted by 363,000. The level is of particularly importance with a gap of about 5.6 million between job postings and available workers.

  The S&P 500 dropped about 2% at today’s open. Today’s low held just above the mid-day low from Monday. That could be a good sign.

• Morning News: May 6, 2022
  Eddy Elfenbein, May 6th, 2022 at 7:04 am

  Ports Race to Clear Cargo, Fearing an Import Overload When China Lifts Lockdowns

  China Danger Strikes Fear Into Global Investors Stumbling on Fed

  China Orders Government, State Firms to Dump Foreign PCs

  Has Shanghai Been Xinjianged?

  The Dollar Is Stronger. Who Wins? Who Loses?

  In More Ways Than One, Fed’s Powell Showed His Strategy This Week

  Why the Fed Waited So Long to Do Something About Inflation

  Ukraine War, Inflation and Covid-19 Keep CFOs on Their Toes Over Forecasts

  U.S. Job Growth Was Sturdy in April, Economists Forecast

  Bankers Quit Jobs for Shot at Riches in ‘Wall Street of Crypto’

  Dubai Aerospace Writes Off $538 Million on Planes Tied to Russia

  Boeing Plans to Move Headquarters to Arlington, Va., From Chicago

  Why Musk’s Twitter Bid Has Shaken Tesla Investors

  Elon Musk’s Fixer Is Quietly Tending the World’s Biggest Fortune

  Facebook Deliberately Caused Havoc in Australia to Influence New Law, Whistleblowers Say

  European Tech Giant Shaken by Bullying Claims, Exodus of Women

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• Morning News: May 5, 2022
  Eddy Elfenbein, May 5th, 2022 at 7:00 am

  China’s Covid Policies Have European Companies Wary of Investing

  Germany’s Military Industry Gears Up to Restock Its Own Forces

  Bank of England Hikes Interest Rates To 13-Year High, Sees Inflation Hitting 10%

  Fed Raises Interest Rate by Half Point, Ratcheting Up Its Inflation Fight

  Fed, Biden Administration Float New Lending Rules for Lower-Income Areas

  American Consumers Are Shopping, Traveling and Working Out Like It’s 2019

  Stock Market Bottom-Fishers Are Trawling Risky Waters

  At 78, Investor Preps for ‘Biggest Bear Market in My Life’

  Elon Musk, Cathie Wood Say Passive Funds Have Gone Too Far

  Elon Musk Secures $7.1 Billion in New Financing for Twitter

  Shell Reports a Record $9.1 Billion Profit

  Shell Takes $3.9 Billion Charge Related to Russia Exit

  Formula One Finally Found a Way to Get Americans to Care

  Companies Confront a New Climate Challenge: Home Offices

  Corporate America Doesn’t Want to Talk Abortion, but It May Have To

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• The Fed Raises Rates by 0.5%
  Eddy Elfenbein, May 4th, 2022 at 2:07 pm

  It’s official. The Federal Reserve raised interest rates by 0.5%. The new target range for Fed funds is 0.75% to 1%. The policy statement said that ongoing increases “will be appropriate.” Starting on June 1, the Fed will start reducing its balance sheet.

  The plan is to ramp up to taking $95 billion off the balance sheet each month ($60 billion in Treasuries and $35 billion in MBS.)

  Although overall economic activity edged down in the first quarter, household spending and business fixed investment remained strong. Job gains have been robust 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. The invasion and related events are creating additional upward pressure on inflation and are likely to weigh on economic activity. In addition, COVID-related lockdowns in China are likely to exacerbate supply chain disruptions. The Committee is highly attentive to inflation risks.

  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 3/4 to 1 percent and anticipates that ongoing increases in the target range will be appropriate. In addition, the Committee decided to begin reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities on June 1, as described in the Plans for Reducing the Size of the Federal Reserve’s Balance Sheet that were issued in conjunction with this statement.

  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; James Bullard; Esther L. George; Patrick Harker; Loretta J. Mester; and Christopher J. Waller. Patrick Harker voted as an alternate member at this meeting.

• Morning News: May 4, 2022
  Eddy Elfenbein, May 4th, 2022 at 7:01 am

  Europe Is About to Ban Russian Oil: What’s Next?

  EU Proposes Sanctions on Main Belarus Potash Companies

  Shanghai Lockdown Reignites Supply-Chain Problems for U.S. Companies

  American Importers Accuse Shipping Giants of Profiteering

  U.S. Real Rates Up on Hawkish Fed but Inflation Risk Looms

  Corporate Defaults Expected to Inch Higher as Federal Reserve Tightens

  The Fed Is Set to Pull Back Economic Help Rapidly. Is It Too Late?

  Jamie Dimon Says Federal Reserve Should Have Raised Rates Sooner

  Record High U.S. Job Openings, Resignations Likely To Fuel Wage Inflation

  U.S. “Open Banking” Rule Bogged Down by Privacy Concerns

  Morgan Stanley Gets a Dose of the Most Feared Woman in Finance

  Wall Street Isn’t Ready for the Crackdown Coming Its Way

  Uber Continues Its Recovery from The Pandemic Lull but Loses $5.6 Billion From Investments

  Starbucks Plans Barista Raises, Says Unionized Cafes Will Need to Bargain

  Social-Media Startups Take Aim at Facebook. And Elon Musk

  Too Many Bears

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• CWS Market Review – May 3, 2022
  Eddy Elfenbein, May 3rd, 2022 at 6:34 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 Worst Stock Market in 83 Years

  On Friday, the S&P 500 dropped 3.63% to close at its lowest level since May 19, 2021. It was the market’s worst day in nearly two years, and it also marked the S&P 500’s worst four-month start to a year since 1939.

  Yikes! But as bad as the S&P 500 has been, the Nasdaq has been even worse. The tech-laden index peaked on November 19 at just over 16,000. By Friday’s close, it had lost more than 23%.

  It’s no secret what’s causing this. By raising interest rates, the Federal Reserve has altered the math behind investing.

  Let me explain. When Covid broke out, the Fed lowered interest rates to the floor. They didn’t want to be caught flatfooted as they had been during the financial crisis. As a result, the Fed effectively took the risk out of the market, and the riskier sectors of the market boomed. Meme stocks took off. The thinking on Wall Street (and in social media) was, “Who cares about archaic things like P/E Ratios when interest rates are free? Just buy any growth name and enjoy the profits!”

  That strategy worked beautifully. Now it’s not. With the Fed raising rates, all those formerly-hot, riskier stocks are falling apart. Meanwhile, more conservative areas of the market like value stocks and low-volatility stocks are holding up quite well. It turns out that P/E Ratios aren’t quite so archaic.

  Check out this chart of the S&P 500 Value Index (in blue) compared with the S&P 500 Growth Index (in black):

  

  One part of the stock market is getting slammed while another part has barely been touched.

  Here’s the thing: The Fed isn’t close to being done. The central bank began its latest meeting today and it will conclude tomorrow. The policy statement will come out tomorrow at 2 p.m. and we can almost certainly expect a 0.5% rate increase.

  The futures market currently has the odds of a 0.5% hike at 98.7%. That seems about 1.29999% too low, but I’m not an FOMC member. Tomorrow’s rate increase will bring the target range for the Fed funds rate to 0.75 to 1%. This is the rate at which banks lend their excess reserves to each other.

  For the next meeting, which takes place in mid-June, futures traders see the Fed hiking rates by 0.75%. That’s followed by 0.5% hikes in July and September. Add those up and it brings the target range for the Fed funds rate to 2.5% to 2.75%.

  After that, it gets a little hazier. I’m also suspicious of forecasts going that far out. Anything can happen between now and then, although futures traders are leaning toward a few more hikes coming in late 2022 and early 2023. That’s certainly a possibility. Harvard economist Kenneth Rogoff said the Fed may have to go as high as 5% to fight off inflation.

  The important thing for investors to understand is that all those rate increases will punish growth stocks and help the relative performance of conservative stocks. For example, on our Buy List, we’ve been doing very well over the last few months with Hershey (HSY). It’s hard to think of a name that’s as conservative as the chocolate folks. The shares are up more than 30% over the last few months. Last week, Hershey’s earnings report trounced Wall Street’s consensus and the company raised guidance.

  When the market turns against a sector, it will show no mercy. Stocks like Netflix (NFLX) are down by two-thirds this year. Remember Moderna (MRNA)? That stock jumped 25-fold in 18 months. It’s now down 70% from its peak.

  How Low Can We Go?

  “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.” So wrote your humble editor five weeks ago. As it turns out, that coincided with the market’s recent peak.

  As much as I’d like to take credit for calling the top, that really isn’t the case. Truthfully, no one can “call” tops or bottoms. Bernard Baruch said, “Don’t try to buy at the bottom and sell at the top. It can’t be done, except by liars.”

  When will this downturn end? Beats me. On Friday, I tweeted, “Going by history, there’s a good chance most of this correction is over.” That tweet got some pushback and I think readers thought I was predicting a bottom. That’s not the case. Instead, I was pointing out that we never know at the time when the bottom is being made. That only happens in retrospect.

  Ryan Detrick points out that since World War II, there have been 24 stock market corrections, meaning falls of 10% or more. The average correction has been 14.3% and has lasted 133 days. We’re already at 117 days and the market is down 13.9%. In other words, what’s happening right now is, in fact, perfectly normal. Of the last 21 times the market fell more than 10% in a given year, it closed positive 12 of those times.

  The plain fact of history is that lousy markets are good times to buy. The price of that is that you have to be a little patient.

  The U.S. Economy Contracted in the First Quarter

  On Monday, we got the latest report from ISM on its Manufacturing Index. This is often an interesting report for a few reasons. One is that it usually comes out on the first business day of the month. As such, it doesn’t suffer from the lag time of other economic reports.

  The ISM Manufacturing Index for April fell to 55.4. That’s down 1.7 from the report for March. Any number above 50 means that the factory sector of the economy is expanding. This was the lowest number in the last 18 months.

  These reports tend to line up well with economic expansions and recessions. The magic number is around 45. Whenever the ISM Manufacturing Index drops below 45, there’s a good chance that the economy is in recession. We’re not there yet.

  The other report that came out last week was the Q1 GDP report. The report showed that the U.S. economy contracted by 1.4% during the first three months of the year. Wall Street had been expecting growth of 1%.

  

  Some explanation is needed. Consumer spending isn’t that bad. For the quarter, it rose by 2.7%. One problem is that the trade deficit knocked 3.2% off economic growth. A drop in defense spending took off another 0.3%. Also, a decline in inventory weighed on results.

  The impact of the Fed’s interest rate hikes hasn’t been felt just yet, but that will soon change. We’ve already seen the dramatic increase in mortgage rates. The average 30-year fixed rate is up to 5.55%. This is the fastest increase in decades. Housing affordability is nearly the worst on record. In the last year, home prices are up 20%.

  We’ll learn more about the economy this Friday when the government releases the April jobs report. The last jobs report showed unemployment at 3.6%. That was lower than the unemployment rate for every single month from 1970 to 2018.

  On Tuesday, the Labor Department released its monthly report on job openings and labor turnover survey (the JOLTS report). The report showed that there’s an all-time record of 11.5 million job openings across the country. Businesses are desperate for workers. For the first time in many years, workers have the upper hand. During March, 4.5 million Americans quit their jobs. There are now 5.6 million more job openings than there are unemployed people.

  Strong Earnings Season for our Buy List

  This earnings season is going very well for our Buy List. We’ve had 16 earnings reports so far and 15 have topped Wall Street’s earnings forecasts. I mentioned Hershey (HSY) before. I was particularly pleased with Sherwin-Williams (SHW). The stock jumped 15% in four days.

  We got another earnings beat this morning. Broadridge Financial Solutions (BR) said it made $1.93 per share for its fiscal Q3. That beat estimates of $1.78 per share. Revenues rose 10% to $1.53 billion and recurring fee revenue increased by 16%.

  If you’re not familiar with Broadridge, the company is the dominant vendor for sending shareholder reports, prospectuses and proxy material to shareholders. Broadridge controls about 80% of the market. It’s a great business to be in, and all that recurring revenue underscores the stability of the business. Check out this long-term chart:

  

  Broadridge now expects full-year recurring fee revenue growth to come in at the high end of its forecast of 12% to 15%. The company also increased the low end of its range for full-year earnings growth. The previous range was 11% to 15% and the new range is 13% to 15%.

  Let’s do some math. Last year, Broadridge made $5.66 per share, so 13% to 15% growth on top of that works out to $6.40 to $6.51 per share. Wall Street had been expecting $6.38 per share.

  Since Broadridge has already made $3.81 per share its first three quarters, that implies a Q4 range of $2.59 to $2.70 per share. The stock gained 2.2% in today’s trading. Broadridge remains a buy up to $160 per share.

  If you want to know more about Hershey, Broadridge and other high-quality names on our Buy List, then please sign up for our premium newsletter.

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

  – Eddy

• Broadridge Earns $1.93 per Share
  Eddy Elfenbein, May 3rd, 2022 at 10:12 am

  We got another earnings report this morning. Broadridge Financial Solutions (BR) said it made $1.93 per share for its fiscal Q3. That beat estimates of $1.78 per share. Revenues rose 10% to $1.53 billion and recurring fee revenue increased by 16%.

  Broadridge now expects recurring fee revenue growth to come in at the high end of its forecast of 12% to 15%. The company is also increasing the low end of its range for full-year earnings growth. The previous range was 11% to 15% and the new range is 13% to 15%.

  Let’s do some math. Last year, Broadridge made $5.66 per share, so 13% to 15% growth on top of that works out to $6.40 to $6.51 per share. Wall Street had been expecting $6.38 per share.

  Since Broadridge has already made $3.81 per share its first three quarters, that implies a Q4 range of $2.59 to $2.70 per share.

• Morning News: May 3, 2022
  Eddy Elfenbein, May 3rd, 2022 at 7:07 am

  Australia Raises Interest Rates for First Time in More Than a Decade

  Russia Dodges Default as Some Investors Receive Dollar Funds

  Russia Turns on Spending Taps to Blunt Economic Impact of War and Sanctions

  Russia Could Sell More Energy to Asia, but Has to Slash Prices

  Get Ready for Another Energy Price Spike: High Electric Bills

  Global Chip Shortage’s Latest Worry: Too Few Chips for Chip-Making

  The Era of Cheap and Plenty May Be Ending

  Big Money Backs Tiny Loans That Lead to Debt, Despair and Even Suicide

  The Hot Housing Market Makes the Fed’s Inflation-Fighting Job Even Tougher

  Amazon Workers Reject Union in New York After Labor Victory at Separate Facility

  BP Takes $25.5 Billion Hit From Russia Exit

  Spirit Airlines Rejects JetBlue Bid, Sticks With Frontier Deal

  ‘I Don’t Really Have a Business Plan’: How Elon Musk Wings It

  Morgan Stanley Raided in Frankfurt in Tax Fraud Investigation

  Another Firing Among Google’s A.I. Brain Trust, and More Discord

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