Archive for July, 2022

• Morning News: July 22, 2022
  Eddy Elfenbein, July 22nd, 2022 at 7:01 am

  Japan Inflation Shows Early Signs of Hitting a Peak

  The Economy Putin Didn’t Actually Ruin

  Europe Joins Fight Against Inflation, Raising Rates for First Time in 11 Years

  Spain’s Finance Minister Says Decision on Bank Tax is “Taken and Fair”

  New China Covid-19 Lockdowns Would Threaten U.S. Economic Recovery (Just Ask Tesla)

  Germany Bails Out Struggling Gas Provider Uniper with a Multibillion-Euro Rescue

  Recession Now Looks Like the Price to Pay for Beating Inflation

  I Was Wrong About Inflation

  BofA Says Stock Outflows Are Catching Up to Market Despair

  ‘Awful’ Snap Sales Wipe $76 Billion From Social Media Stocks

  China Fines Didi $1.2 Billion as Tech Sector Pressures Persist

  Airlines Are Making Money Again, But They Can’t Keep Up With Surging Travel Demand

  Amazon Faces Fierce Competition in Health Ambitions After One Medical Deal

  Domino’s Earnings Miss Expectations as Pizza Chain Struggles with Driver Shortage, Higher Costs

  Three Arrows Founders Break Silence Over Collapse of Crypto Hedge Fund

  A Town Built on Gold Is Being Swallowed by the Earth

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• Morning News: July 21, 2022
  Eddy Elfenbein, July 21st, 2022 at 7:00 am

  Russia Resumes Nord Stream Natural-Gas Supply to Europe

  U.S. Initiates Trade Fight With Mexico Over Energy Policy

  Japan Leaves Weak Yen Alone Despite Above-Target Inflation

  The Relentlessly Peculiar Notion of Government ‘Fighting’ Inflation

  A Recession Alarm Is Ringing on Wall Street

  U.S. Home Prices Hit Record of $416,000 in June as Sales Continued to Slide

  The US Has Lost Its Way on Computer Chips

  How Software Is Stifling Competition and Slowing Innovation

  More Investors Vote Against Corporate Directors Over Climate Change

  Angel Investor Calacanis Rips Into ‘Grifting’ VCs Flipping Crypto Tokens to Retail

  Loans Could Burn Start-Up Workers in Downturn

  Protesting Truckers Pledge Extended Blockade of Port of Oakland

  Apple Can Hit $3 Trillion on Services Shift, Morgan Stanley Says

  Tesla Ends Streak of Record Quarterly Profits After China Factory Shutdown

  Elon Musk Signals Optimism Tesla’s ‘Supply Chain Hell’ Will End

  China Fines Didi $1.2 Billion After Wrapping Year-Long Probe

  Why Netflix’s Earnings Weren’t Enough to Restore Confidence

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• Abbott Beats the Street
  Eddy Elfenbein, July 20th, 2022 at 10:24 am

  The stock market is down a bit so far in early trading.

  Abbott Labs (ABT) kicked off earnings season for us this morning. For Q2, Abbott earned $1.43 per share. That was 31 cents better than estimates.

  The company now expects full-year earnings of at least $4.90 per share. That’s an increase of 20 cents per share to its previous forecast. The shares are currently down about 2%.

  The existing-home sales report came out this morning. The number of existing homes sold fell to a two-year low. The annualized rate was 5.12 million. Expectations were for 5.35 million. Hats off to Tom Lawler, the housing economist, who got the number exactly right.

  The median sales price rose to $416,000 which is another record.

• Morning News: July 20, 2022
  Eddy Elfenbein, July 20th, 2022 at 7:07 am

  ‘My Worldview Has Been Destroyed’: Chinese Banking Scandal Tests Faith in the System

  Russia Is China’s Top Oil Supplier for 2nd Month, Saudi Volumes Tumble

  Putin Signals Russian Gas Will Resume in a Key Pipeline but at a Reduced Level

  Inflation Climbs to 9.4 Percent in Britain, a New 40-Year High

  Italy Is Haunted by the Pain of Past Economic Crises

  ECB Being Pulled in Multiple Directions as It Preps First Rate Rise in Decade

  Powell’s Econ-101 Lesson Presents Best-Case Inflation Scenario

  Bernstein Strategists Say Stocks Have Yet to See Capitulation

  Blackstone Sees Fed Funds Rate Near 5% on Longer Hiking Cycle

  Sam Bankman-Fried Turns $2 Trillion Crypto Rout Into Buying Opportunity

  CFPB to Push Banks to Cover More Payment-Services Scams

  Mortgage Demand Drops to a 22-Year Low as Higher Interest Rates and Inflation Crush Homebuyers

  Home Building Stalls as the Real Estate Market Cools. That Won’t Help Affordability

  As EVs Go Mainstream, A Rush for Share of Home Charger Market

  The Pilot Shortage Is About to Get A Lot Worse

  Eric Adams Says NYC ‘May Not Have Central Business Districts Anymore’ as Remote Work Persists

  Twitter-Musk Trial Set for October in Lawsuit Over Stalled $44 Billion Takeover

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• CWS Market Review – July 19, 2022
  Eddy Elfenbein, July 19th, 2022 at 4:23 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.”)

  Inflation-Phobia Stalks Wall Street

  The stock market is still spooked by last week’s CPI report. Some observers thought we might see some cooling off of inflation. Well, that was not the case. Over the last year, inflation is running at 9.1%.

  Inflation falls particularly hard on lower-income consumers and we’re already seeing it alter consumer behavior. According to the latest data, consumers are cutting back on purchases at the grocery store. Last month, for example, the price for a pound of white bread got to $1.69. That’s up 12% from last year. A pound of wheat bread got to $2.22, which is a record. In many parts of America, gasoline recently broke $5 per gallon, although it’s been drifting lower recently.

  While inflation is tough for consumers, it also wreaks havoc on the financial markets. The data shows that inflation is fairly benign until it gets to about 5%. Above that, stocks start to feel the squeeze, and right now, we’re nearly double that rate. This is why everyone is on edge.

  Following last week’s inflation report, there was a brief period where traders were expecting a full 1% increase from the Federal Reserve at next week’s FOMC meeting. However, the Wall Street Journal had a story over the weekend which said that a 0.75% increase is much more likely. As we know, the Fed pays close attention to inflation expectations. A recent survey of inflation expectations dropped to its lowest level in a year.

  Still, that hasn’t calmed folks down. Despite the WSJ article, traders are currently placing 35% odds on a 1% hike. I doubt that will happen, but it shows how unnerved traders are. Even if we only get a 0.75% hike next week, we’ll probably get another 0.75% increase in September. Before the end of the year, it’s very possible that short-term interest rates will be 2% higher.

  The higher rates are already having an impact. This morning, we got a report that housing starts fell for the second month in a row. Housing starts are now at a nine-month low. The bright spot, if there is one, is that homebuilders are still busy working down their backlog of unfilled orders.

  The U.S. Dollar’s “Doom Loop”

  Another side effect of higher interest rates is the soaring U.S. dollar. Recently, the dollar reached parity against the euro for the first time in 20 years. The dollar has also reached an all-time high against the Indian rupee. It also reached a high against the yen.

  There’s even been talk of a possible “doom loop” involving the U.S. dollar. Simply put, that means that the strong dollar causes economic weakness which in turn leads to an even stronger dollar, which leads to more weakness. The cycle then repeats itself ad nauseam.

  In normal times, that’s an easy cycle to break. The Fed would simply lower interest rates and weaken the dollar, but it can’t do that now with inflation heading toward 10% per year.

  Here’s the Dollar Index. Notice how strongly it has rallied over the last year.

  

  This angle gets more interesting because the European Central Bank meets on Thursday and is expected to raise interest rates for the first time in 11 years. The ECB’s President, Christine Lagarde, has signaled that the ECB will hike by 0.25%, but some economists think it will be a 0.5% increase.

  The strong dollar is having an impact almost everywhere. Obviously, the Fed is keeping its eye on the foreign exchange market, but we’re seeing its impact within U.S. companies. While the dropping euro is great for U.S. tourists, it’s terrible news if you’re a big tech stock.

  I’ll give you a perfect example. Yesterday afternoon, IBM (IBM) reported decent results for its Q2. For the quarter, IBM made $2.31 per share which was four cents better than Wall Street’s consensus. The company also said that it shut down its operations in Russia.

  But neither of those issues were the big story. Instead, IBM said it expects to take a 6% hit to its revenues thanks to the strong dollar. That’s a big bite. IBM’s earlier projection had been for a hit of 3% to 4%. Q2 revenue was hit by $900 million thanks to the greenback. We’re talking about a $3.5 billion bite this year. Despite a good quarter, the dollar news dominated everything, and it’s likely to get worse. Shares of IBM fell 5.25% today.

  This is just the beginning. The strong dollar is going to beat up several more tech stocks this year. We just don’t know yet which ones and how much.

  Earnings Season Is Heating Up

  This is also the start of earnings season. Only about 9% of the S&P 500 has reported so far, so it’s too early to draw any large conclusions. The “beat rate,” meaning how many firms have reported earnings better than expected, is running at 65%. That may sound good, but it’s well below the 77% rate that Wall Street has averaged over the past five years.

  By the way, you read that correctly. Historically, a large majority of companies beat expectations, but those are the official expectations. The expected expectations may not be the same as the official expectations. Some companies are very skillful in managing what Wall Street analysts say. It’s all about expectations.

  Wall Street had been nervous going into this earnings season. A recent survey by Bank of America showed wide-spread pessimism from investors. Recession expectations are at their highest levels since the pandemic.

  Fortunately, many of the earnings reports we got today relieved investors. The dollar also fell some today which probably helped the bulls. The S&P 500 closed higher by 2.76%. This was the best day for stocks in nearly one month. For the first time since April 20, the S&P 500 closed above its 50-day moving average. That can often be a good omen, but I encourage you not to read too much into it.

  

  The Nasdaq Composite also had a very good day. The index closed higher by 3.1%, but the really strong index today was the Russell 2000. The small-cap index rallied 3.5% today.

  Here’s a great stat from Callie Cox: ten times this year, the S&P 500 has rallied more than 1% during the day only to finish lower on the day by the closing bell.

  Shares of Johnson & Johnson fell over 1% today after the company beat earnings but lowered its guidance for the rest of this year. Lockheed Martin missed expectations, but the stock rallied 0.8% today.

  In after-hours trading, shares of Netflix traded higher by 8%. The good news for Netflix is that it “only” lost 970,000 subscribers last quarter. Wall Street had been expecting a loss of two million. Once again, it’s all about expectations.

  Tomorrow, we’ll get our first Buy List earnings report when Abbott Labs (ABT) releases its Q2 earnings report. The results will come out before the opening bell.

  Previously, the company told us to expect full-year earnings of $4.70 per share. For Q2, Wall Street expects earnings of $1.12 per share. Not only am I expecting Abbott to beat Wall Street’s view for Q2, but I think there’s a good chance they’ll raise their full-year guidance as well.

  Mueller Industries Soars 14.5%

  In June 2021, I featured a small stock for you called Mueller Industries (MLI). Muller is one of those little stocks that’s virtually ignored by Wall Street. The company has a great long-term track record, yet no Wall Street analysts follow it.

  Mueller is a leading manufacturer of copper, brass, aluminum and plastic products. This is a classic small-cap cyclical stock. Once you realize the scope of their business, you understand that the use of Mueller’s products is seemingly endless. Mueller makes everything from copper tubing and fittings to brass and copper alloy bars and refrigeration valves.

  You can find Mueller most anywhere. Some of the companies that rely on Mueller are in sectors like plumbing, heating, air conditioning, refrigeration, appliance, medical, automotive, military and defense, marine and recreational. Mueller’s operations are located throughout the United States and in Canada, Mexico, Great Britain, South Korea, and China.

  Mueller has about 5,000 employees and it’s based in Collierville, Tennessee. The company’s operations are divided among three divisions: Piping Systems, Industrial Metals, and Climate.

  

  I bring up Mueller because the company released an outstanding earnings report. I can’t tell if it beat expectations or not because no one follows it, so there are no expectations. For Q2, Mueller made $3.65 per share. That’s up from $1.92 per share for last year’s Q2. Mueller has zero net debt.

  The shares rallied 14.5% today. Over the last 30 years, Mueller is up more than 100-fold, and no one on Wall Street follows them. Sigh.

  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: July 19, 2022
  Eddy Elfenbein, July 19th, 2022 at 7:05 am

  Indian Rupee Hits Weakest Level Ever Against the Dollar

  Romania Warns Corn Exports May Slump as Drought Shrinks Harvest

  Polish Households Face 180% Power Price Hike, Watchdog Warns

  US Gasoline Prices Fall to Two-Month Low With Pump Pain Easing

  How Joe Manchin Left a Global Tax Deal in Limbo

  New Vatican Policy Orders Foreign Investment Accounts Closed

  Yellen Calls for Trade Overhaul to Diversify From China

  Banks’ Snubbing of Junk-Rated Loan Funds Worsens Financing Logjam

  BofA Survey Shows Full Investor Capitulation Amid Pessimism

  This Pioneering Economist Says Growth Obsession Must End

  Housing Boom Fades World-Wide as Interest Rates Climb

  Air Travel Is Broken. Here’s Why.

  Who Will Blink First in the Battle for Control of Spirit Airlines?

  GM Will Finally Have a Rival to Tesla’s Model Y With Blazer EV

  IBM Second-Quarter Earnings Advance on 9% Sales Growth

  Toys ‘R’ Us Is Coming Back. Soon, It’ll Be Almost Everywhere

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• How AFLAC Hedges Currency Risk
  Eddy Elfenbein, July 18th, 2022 at 11:02 am

  AFLAC (AFL) gets about 70% of its income from Japan. This causes an issue for the company because that money needs to be converted to dollars for its shareholders.

  The problem is that a large currency swing can wipe out its profits. Right now, the yen is at a 20-year low versus the dollar.

  That’s why AFLAC hedges its currency risk. The WSJ had an article today taking a closer look at how the company goes about this. The company employs three strategies.

  First, AFLAC’s Japanese subsidiary owns dollar-denominated assets. Conversely, the U.S. holding company owns yen-denominated debt. The third part is that the company buys forward contracts that let it convert yen to dollars at different prices and at different times. The contracts typically go out less than two years and are long the dollar and short the yen.

  This helps AFLAC reduce its currency risk, but there’s always going to be some. For example, in Q1, the currency exchange pinged its earnings by six cents per share. That’s not so much.

  The next earnings report is due out on August 1.

• A Few Small Items
  Eddy Elfenbein, July 18th, 2022 at 10:32 am

  A few items to pass along.

  Google (GOOG) split 20-for-1 today. This is the first split in the company’s history. The share price drops 95% but you now have 20 times as many shares. In 2004, the stock went public at $85 per share, which is $4.25 per share in split-adjusted terms.

  The earnings “beat rate” this season is running around 60%. That’s below the 5-year average of 77%, but it’s still early.

  Trex (TREX) said it will report Q2 earnings on August 8. Wall Street expects 67 cents per share.

  Ross Stores (ROST) said that in June and July, it opened 21 Ross Dress for Less stores and eight dd’s DISCOUNTS® stores.

  “These recent openings reflect our ongoing commitment to expanding our two chains,” said Gregg McGillis, Group Executive Vice President, Property Development. “This summer, we expanded our presence in our largest markets of California, Florida, and Texas, and also added locations in newer states, including North Carolina for dd’s as well as Ohio for Ross. Looking ahead, we remain confident in our ability to grow to at least 2,900 Ross Dress for Less and 700 dd’s DISCOUNTS locations over time.”

• The Fed Is Leaning Towards a 0.75% Hike
  Eddy Elfenbein, July 18th, 2022 at 10:04 am

  The stock market is having a good morning so far. The S&P 500 is currently up 0.79%.

  More banks are reporting earnings. This morning, Goldman Sachs said it made $7.73 per share. Wall Street had been expecting $6.58 per share. Bank of America made 73 cents per share. That was five cents below estimates.

  Yesterday, the Wall Street Journal reported that the Fed will raise interest rates by 0.75% at its meeting next week. There had been some speculation that the Fed would go for a full 1% increase.

  From the WSJ:

  On Friday, a University of Michigan survey of consumers’ long-term inflation expectations fell to its lowest level in a year, which weakened the case for a 1-percentage-point rate rise. Fed officials keep a close watch on households’ and businesses’ expectations of future inflation because they believe such expectations can be self-fulfilling.

  Market-based measures of future inflation have also drifted to their lowest levels since Russian President Vladimir Putin’s invasion of Ukraine in late February.

  “They can take comfort from that,” said Laurence Meyer, a former Fed governor. “This takes the pressure off of them. I don’t think they want to go 100.”

• Morning News: July 18, 2022
  Eddy Elfenbein, July 18th, 2022 at 7:05 am

  Economic War of Attrition Takes Toll on Russia, West

  Europe Fears Economic Fallout if Russian Gas Outage Drags On

  Recession Fears, Trade Shifts Whipsaw Global Grain Markets

  Bread for $10 Is the New $5 Gas as Demand Wanes for Basics

  Global Central Banks Ramp Up Inflation Fight

  Why the US Dollar Is Booming and Creating a Possible Doom Loop

  The US Is Exporting Inflation, and Fed Hikes Will Make It Worse

  A Goldman Legend, Crypto Star and Top Banker Warn of Next Big Risk

  Morgan Stanley Sees Stock Losses Even If There’s No Recession

  The True Inflation ‘Crisis’ Is a Redefinition of the Word ‘Inflation’

  Mexico’s Unicorns Unlikely to IPO Locally, Says Mexican Exchange CEO

  Massive Wall Street Layoffs Feared As Banking Profits Tank

  Diverging Jobs Data Raise Questions About Labor Market Health

  Amazon C.E.O. Andy Jassy Breaks From the Bezos Way

  Delta Buys 100 Boeing Max Planes, Its First Major Order with the Manufacturer In More Than a Decade

  Bed Bath & Beyond Is In Crisis Mode. What Went Wrong?

  China Weighs Mortgage Grace Period to Appease Angry Homebuyers

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