Archive for July, 2022

• Jobs Growth and Recessions
  Eddy Elfenbein, July 31st, 2022 at 4:23 pm

  Here’s something I wanted to look at in more depth and found that there’s really not much there. Unfortunately, this happens a lot with research. Despite the results, I thought I’d share it with you.

  I wanted to see how well jobs growth aligned with official recessions. The answer is “kind of, but not really that well.”

  I took the last 1,000 months of nonfarm payroll data. I then sorted the data into 10 buckets of 100 months each based on monthly jobs gain.

  To make the jobs data easier to read, I changed it from a percentage gain to an actual result that’s based off the current jobs number (151,980 jobs). That way, it will line up with this Friday’s jobs report.

  For example, I found that there were 100 months in which the economy added 775,000 or more jobs. Just one of those months was an official recession.

  At the other end, there were 100 months when the economy shed 275,000 or more jobs. Of those, 72 were in an official recession.

  Here’s what the data looks like. The “From” and “To” columns are the boundaries of the 10 buckets. The jobs numbers are in thousands.

  

  Not surprisingly, actual jobs gains and losses appears to be an inflection point for recession calls.

  For example, there were 224 months when the economy lost jobs, or jobs growth was flat. Exactly half of those months came during official recessions.

  There were 776 months when the economy added jobs. Just 20 of those months (less than 3%) came during official recessions.

  Part of the problem is that jobs tend to be a lagging indicator. For example, here’s jobs growth during the Great Recession. Notice how jobs growth was still negative several months after the recession ended (the gray areas).

  

  The recession in the early 2000s is an especially good example. The official recession was only eight months long, but the jobs market was weak for a long time afterward.

  

  You may recall that the phrase “jobs-less recovery” was very popular at the time.

  If this Friday’s NFP report is positive, then it’s historically unusual for this to be a recession. For now.

• PCE Price Index Jumps to 40-Year High
  Eddy Elfenbein, July 29th, 2022 at 12:37 pm

  As is often pointed out, the Federal Reserve prefers to follow the Personal Consumption Expenditures price index for its inflation figure rather than the Consumer Price Index.

  Today we learned that the PCE price index increased by 6.76% in the 12 months ending in June. That’s the steepest increase in 40 years.

  The CPI and PCE had been showing a divergence. The PCE increases had peaked in March. That is, until we got today’s report for June.

  The core PCE price index is up 4.79% over the last year. That’s still below its peak of 5.31% which is hit in February.

  In single-month terms, PCE was up 0.95% in June while the core rate was up 0.59%.

• Morning News: July 29, 2022
  Eddy Elfenbein, July 29th, 2022 at 7:02 am

  Euro-Zone Inflation Hits Record, Backing Calls for Larger Hikes

  U.S. GDP Fell at 0.9% Annual Rate in Second Quarter; Recession Fears Loom Over Economy

  How Goes the War on Inflation?

  Manchin-Schumer Deal Would Have Moderate Inflation-Fighting Effect, Economists Say

  US Banks Passed the Latest Stress Test, But Are Still Unhappy

  Exxon Profit Soars to All-Time High as Energy Markets Convulse

  How Spirit Airlines CEO Christie Did His JetBlue Deal U-turn

  Big Tech Is Proving Resilient as the Economy Cools

  Apple Profit Drops 11%, but iPhone Escapes Economic Slump

  Amazon Posts Net Loss for the Second Straight Quarter as It Manages Slower Demand

  Mark Zuckerberg’s Bid to Reinvent Facebook Parent Meta Hits Early Snags

  Which Intel CEO Is to Blame for the Current Woes? Or Is It Actually AMD’s CEO?

  Sony Trims Profit Forecast after Games Business Falters

  Jack Ma Escapes Beijing’s Crosshairs by Giving Up His Power

  Diageo Boosted by Drinkers’ Growing Thirst for High-End Spirits

  The Crypto Collapse Has Flooded the Market With Rolex and Patek

  The Country That Wants to ‘Be Average’ vs. Jeff Bezos and His $500 Million Yacht

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• Morning News: July 28, 2022
  Eddy Elfenbein, July 28th, 2022 at 7:06 am

  They Flocked to China for Boom Times. Now They’re Thinking Twice.

  Semiconductor Subsidies, Tariffs Are the Price of Reducing Dependence on China

  Jack Ma Plans to Cede Control of Ant Group

  Climate Change Is Probably a Drag on Growth, but It’s Unclear How Much

  The Strong Dollar Is Wreaking Havoc Globally — And It’s Just Getting Started

  Fed Fights Inflation With Another Big Rate Increase

  Fed Watchers Say Markets Got It All Wrong on Powell ‘Pivot’

  Inventory Swing Is a Key Culprit Behind U.S. Recession Talk

  JetBlue Agrees to Buy Spirit Airlines for $3.8 Billion

  Boeing Profit Falls as Executives Point to Turnaround

  F.T.C. Sues to Block Meta’s Virtual Reality Deal as It Confronts Big Tech

  Facebook Parent Meta Platforms Reports First Ever Revenue Drop

  Shell Smashes Record Again With $11.5 Billion Profit

  Ford CEO Farley Says Automaker ‘Absolutely Has Too Many People’

  Ford Wants Cops to Go Electric By Buying Its New F-150 Pickup Truck

  Comcast Fails to Add Broadband Subscribers for First Time Ever as Economy Slows

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• Morning News: July 27, 2022
  Eddy Elfenbein, July 27th, 2022 at 7:06 am

  U.S., Europe Dig In for Long Economic Standoff With Russia

  US Risks Losing Billions in Taxes as Congress Spurns Global Deal

  A $9.4 Trillion Results Day Looms in a Test for Stock Market

  Inflation Is High. How Will Rate Increases Fix That?

  How Bacon and Costco Fish Shape America’s View of Inflation

  Biden Insists There’s No Recession as He Confronts Latest Economic Risk

  What Is Stagflation? What to Know About the Combination of High Inflation and Stagnating Economic Growth

  After Fed Raises Interest Rates Wednesday, Investors to Look for Clues About What’s Next

  Cathie Wood Dumps Coinbase Shares for First Time This Year

  Don’t Expect Big Consumer Brands to Lower Prices Soon

  Homebuilders Are Boosting Incentives as They Suddenly Struggle to Sell Homes

  ‘Operating With Increased Intensity’: Zuckerberg Leads Meta Into Next Phase

  General Motors’ Income Tumbles 40% on China Loss, Parts Shortages

  Everybody Into the Hotel Pool! That’ll Be $200.

  This Fast-Food Restaurant’s Founder Bought a Lottery Ticket for the $810 Million Mega Millions Jackpot for All 50,000 of His Employees

  Unilever Boss Tells Ben & Jerry’s to Stay Out of Geopolitics After Israel Flap

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• CWS Market Review – July 26, 2022
  Eddy Elfenbein, July 26th, 2022 at 7:58 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.”)

  This is an unusually busy week for the stock market. About one-third of the companies in the S&P 500 are due to report their earnings this week. There’s also a Federal Reserve meeting with an expected rate hike. If that’s not enough, we’ll also get our first look at the report on Q2 GDP.

  So far, our Buy List earnings reports are looking quite good. I’ll have more details in the premium issue later this week. Fiserv, for example, released a nice earnings report this morning, and the company raised its full-year guidance. The stock rallied over 4.2% today.

  Walmart Drops 8% on Profit Warning

  This earnings season, Wall Street is keeping a close eye on how companies are dealing with rising costs. This is a tough issue because it works at both ends. Companies are facing rising input costs for their goods, and they need to pass along on their higher expenses to their customers. Some companies can do this effectively, while others cannot.

  With investing we always want to look at “switching costs.” This is one of the key pillars of “wide-moating” investing.

  Think of it this way: if Company X were to disappear tomorrow, how easily would consumers be able to move on? If its products aren’t available, could they be effectively mimicked somewhere else? For some companies, that’s not a problem but as investors, we want to focus on stocks that are nearly irreplaceable.

  For many years, there simply was no substitute for Walmart (WMT). In fact, the company rose to prominence by being a substitute for Main Street.

  I mention Walmart because after the closing bell yesterday, Walmart shocked Wall Street by lowering its guidance for this year. I should explain that Walmart is so large that its quarterly earnings report is effectively a report on American consumer behavior. The company will have sales this fiscal year of about $600 billion.

  In May, Walmart said it’s expected to see its operating income for the year fall by 1%. Now it’s expecting a drop of 10% to 12%. The initial estimate had been for an increase of 3%. Walmart laid the blame on inflation. The retail giant said that higher prices are holding back shoppers.

  This isn’t the first time Walmart said it’s having trouble. In May, the company said that it was sitting on too much inventory. That’s about the worst problem a retailer can face. The only way out is to slash prices and hope the goods finally move. In May, Walmart said that its inventory jumped by 33% during Q1.

  On Tuesday, shares of Walmart dropped by close to 8%. The company’s warning scared the entire sector. Shares of Target and Amazon also got punished, but by not as much as WMT. Walmart is also a component of the Dow Jones Industrial Average so its fate has an out-sized impact on the stock market

  

  Walmart, like many retailers, follows an off-cycle reporting schedule. Its fiscal year ends at the end of January. It does this so the holiday shopping season lands in one reporting quarter. This means that its fiscal Q2 will end at the end of this month. Walmart will report its results for Q2 on August 16.

  Walmart said that it expects to see comparable-store sales growth of 6% for Q2. The problem is that the growth is coming from the low-margin areas. For Walmart, its groceries are nearly a loss leader. They only sell grocery items to get people inside. The apparel business carries much larger profit margins.

  During an inflationary environment, consumers tend to focus on lower-priced items, be it beer or coffee or dining out. Once again, it’s about switching costs.

  This spring, the big box retailers have been facing big problems of shifting consumer behavior. During the pandemic, shoppers used their stimulus checks to buy things like patio furniture. While that’s good, those tend to be one-shot items. Consumers aren’t going to buy patio furniture again next year. The issue isn’t as much about growth as it is about maintaining profitability.

  Weakness at Walmart is not an encouraging sign for the overall health of the U.S. economy.

  Are We in a Recession?

  On Thursday, the government will release its initial report on Q2 GDP growth. Wall Street expects low but positive growth, but there is a good chance that growth will be negative. If that’s the case, it will be the second quarter in a row of negative GDP growth. For Q1, the economy shrank at a 1.6% annualized rate.

  Two or more quarters in a row of negative GDP growth is often called the definition of a recession; however, that’s not technically correct. I hate to get into issues of semantics, but in this case it matters.

  Two or more quarters of negative GDP is a convenient shorthand for a recession. Most times, that would align with a recession, but there can be exceptions. This could be one of those times.

  The committee that decides when recessions begin and end is run by the National Bureau for Economic Research (NBER). This is from their website:

  The NBER’s traditional definition of a recession is that it is a significant decline in economic activity that is spread across the economy and that lasts more than a few months. The committee’s view is that while each of the three criteria—depth, diffusion, and duration—needs to be met individually to some degree, extreme conditions revealed by one criterion may partially offset weaker indications from another. For example, in the case of the February 2020 peak in economic activity, we concluded that the drop in activity had been so great and so widely diffused throughout the economy that the downturn should be classified as a recession even if it proved to be quite brief. The committee subsequently determined that the trough occurred two months after the peak, in April 2020. An expansion is a period when the economy is not in a recession. Expansion is the normal state of the economy; most recessions are brief. However, the time that it takes for the economy to return to its previous peak level of activity may be quite extended.

  The problem is that the drop of 1.6% for Q1 sounds worse than it was. During Q1, consumer spending held up relatively well despite rising costs. This is an example of something sounding like a lame excuse, but it is true in this case.

  I think it’s unlikely that the U.S. is in a recession at the moment. I would place the odds at 30%, give or take. However, I’m more concerned about where the economy is headed in the near future, and it’s not encouraging. If we were to look out some, then I would say there’s a 75% chance of a recession starting sometime in the next 12 months.

  Expect the Fed to Hike Rates by 0.75%

  Much of the direction of the economy depends on what the Federal Reserve plans to do. The Fed meets this week, starting today and concluding tomorrow. The Fed’s policy statement will be out tomorrow afternoon at 2 p.m. ET.

  It’s very likely that the Fed will raise short-term interest rates by 0.75%. That will bring the target for the Fed funds target range to 2.25% to 2.5%. Traders on the futures markets think there’s a 25% shot of a full 1% increase. That’s probably unlikely, but it’s interesting that some people are expecting that.

  What comes next? I think we can expect more rate hikes, but this is the problem for the Fed. If the economy starts to show weakness, there will be pressure to stop the hikes, or even cut rates.

  In fact, futures traders expect a rate cut next year. That’s highly unusual. Quick pivots in Fed policy have certainly happened before, but I don’t recall a pivot that was expected.

  The futures market now thinks the Fed will have its target range at 3% to 3.25% in June 2023. That’s 0.25% lower than the prior in meeting in May. A recession next year is a very real possibility.

  Good Relative Performance for our Buy List

  I’m always a little hesitant to highlight our performance when our Buy List is doing well. I don’t want to jinx it, but I will take a brief moment to point out that our strategy has been outperforming the market over the last several weeks.

  Since April 4, the AdvisorShares Focused Equity ETF is down 7.49% while the S&P 500 ETF is down 14.06%. Yes, I’m guilty of some minor cherry-picking, but we’ve earned it. Being down less in a down market may not sound like a great result but it makes a big difference over the long term.

  

  If you want to learn more about our ETF, you can visit our website here.

  3M to Spin Off Its Health Care Business

  Before I go, I wanted to mention today’s announcement from 3M (MMM). I discussed this stock last year as an example of a good company that’s been weighed down by legal costs.

  For years, 3M was a great company. Blue chips don’t get much bluer than 3M. It’s beaten the market and consistently increased its dividend. Recently, however, the stock has lagged badly.

  When a well-run outfit sees its stock lag, I take notice. The problem 3M faces is lawsuits regarding the environmental damage resulting from chemicals it used to use. There’s also a lawsuit regarding 3M’s earplugs for the military.

  Today, 3M said it will spin off its health care business. It will also seek bankruptcy for its subsidiary that made the military earplugs.

  I like to see companies break themselves up. Pay attention when a good company has a garage sale. This can often be very good for shareholders. The new companies are no longer burdened with the legacy costs of the parent companies.

  With the health care business gone, 3M will be in three business lines; safety and industrial products, consumers products and electronics and transportation. It will still be a very sizeable company. The stock gained 5% today.

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

  – Eddy

• Morning News: July 26, 2022
  Eddy Elfenbein, July 26th, 2022 at 7:05 am

  As Prices Soar in Ukraine, War Adds Economic Havoc to the Human Toll

  Earnings and Gas Worries Keep Europe Subdued

  China Targeted Fed to Build Informant Network, Access Data, a Probe Says

  Powell’s Bond Market Recession Indicator Is Sending a Warning

  Fed Prepares Another Rate Increase as Wall Street Wonders What’s Next

  Why a Strong Dollar Is a Double-Edged Sword for the U.S. Economy

  She’s 17 and Has a Roth IRA. How Gen Z Is Handling Its First Bear Market

  The ‘Free’ Checking Myth Is Costing Consumers Over $8 Billion

  Low-Cost Cities With Strong Economies Remain Attractive as Housing Market Slows

  More Signs Emerge That Inflation Is Altering Shopping Habits

  Melting Profits Threaten the Ice Cream Man

  Tech Antitrust Bill Threatens to Break Apple, Google’s Grip on the Internet

  Newly Cheap Microsoft Is Still a Favorite Growth Play for Investors

  GE Tops Estimates After Aviation Sales Surge

  Coca-Cola Tops Sales Estimates on Higher Prices, Raises Guidance

  G.M. Profit Falls 40 Percent as Costs Rise and Chips Are Lacking

  UBS Misses Expectations; CEO Cites One of the ‘Most Challenging’ Quarters for Investors in a Decade

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• Get Ready for a Busy Week
  Eddy Elfenbein, July 25th, 2022 at 10:42 am

  The stock market is a bit lower this morning. This will be a busy week for Wall Street. We have lots more earnings plus the Fed meeting. About one-third of the S&P 500 is due to report earnings this week.

  This is the final week of trading for the month of July, and it looks like it could be the market’s best month of the year so far. Tech stocks are lagging so far today, and energy stocks are doing well.

  For this week’s meeting, traders see a 77% chance of a 0.75% rate increase. Assuming that’s correct, traders are about evenly divided on the outlook for the September meeting. About half see a 0.5% increase, while the other half sees a 0.75% rate increase.

  The GDP report is due out on Thursday. This will be the government’s first look at how well the economy did during the second three months of this year. Wall Street is expecting small but positive growth.

• Morning News: July 25, 2022
  Eddy Elfenbein, July 25th, 2022 at 7:07 am

  China’s Gen Z Is Dejected, Underemployed and Slowing the Economy

  China Chases Chip-Factory Dominance—and Global Clout

  Japan Is a Reminder of How Situational Today’s Inflation ‘Hawk-ery’ Is

  Germany on Cusp of Recession, Says Ifo, as Business Sentiment Sinks

  Bank of England Policymakers Torn on Need for Big Rate Move Next Week

  Fed’s United Front on Interest Rates May Soon Be Tested

  Morgan Stanley, JPMorgan Disagree on Outlook for Fed’s Pivot

  The 60/40 Strategy Will Make a Comeback, Morgan Stanley Says

  Weak Earnings Reports Aren’t Fazing Investors After Brutal Year for Stocks

  ‘I’m Always Worrying’: The Emotional Toll of Financial Stress

  Cheaper Beer, Cigarettes Gain Favor as Inflation Pinches Shoppers

  We Need to Keep Building Houses, Even if No One Wants to Buy

  A $40 Billion Wireless Sector Meltdown Puts Focus on T-Mobile

  Why Big Tech Is Making a Big Play for Live Sports

  Bed Bath & Beyond Followed a Winning Playbook—and Lost

  Clock Ticks for Evergrande Restructuring Plan After Shakeup

  Ties Between Alex Jones and Radio Network Show Economics of Misinformation

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• The S&P 500 briefly breaks 4,000
  Eddy Elfenbein, July 22nd, 2022 at 11:02 am

  This latest bear-market rally is looking pretty good. It’s the second-best rally of this bear market. Here’s a list of the others.

  

  The S&P 500 briefly broke above 4,000 this morning. Earnings are still the big story. Facebook is down over 5%. Verizon is off by more than 6% after it missed by a penny per share. Shares of Snap are down 36% today after another terrible earnings report.

  Yesterday’s jobless claims report rose to 251,000. I wouldn’t say that’s a higher number, but it’s certainly a trend of higher claims. This may show up in the official jobs report soon.