Archive for August, 2022

• CWS Market Review – August 9, 2022
  Eddy Elfenbein, August 9th, 2022 at 7:32 pm

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  The Blow-Out July Jobs Report

  Last Friday, the Bureau of Labor Statistics released the jobs report for July, and it was much stronger than analysts had been expecting. According to the government, the U.S. economy created 528,000 net new jobs during the month of July. That was more than double expectations.

  This report came in for especially close scrutiny since the last two GDP reports were negative. While that’s not a recession according to the technical definition, it certainly is cause for concern. Even though there are pockets of weakness in the economy, such as business and residential construction, the labor market has been holding up well. At least for now.

  

  I don’t believe we’re currently in a recession, and some folks are being unduly alarmist. However, I am concerned that a recession may start sometime in the next six to 12 months. That’s why it’s crucial for investors to maintain a conservative posture. This is especially true with rising inflation and interest rates.

  One encouraging sign is that the U.S. economy just passed an important threshold: the economy has now made back all the jobs it lost during the economic shutdown of 2020. In two months, the economy shed 21.991 million jobs, but in the 27 months since then, we’ve made them all back. Add it all up and in a 29-month period, the U.S. created a grand total of 32,000 jobs.

  Still, there are parts of the economy that suffered greatly during the lockdowns. If the economy were to have the same jobs-to-population ratio that we had two years ago, then we would need an additional 1.7 million new jobs.

  According to the jobs report, the unemployment rate fell to 3.5% last month which matches a 50-year low. I dug through the data and calculated the jobless rate number out for a few decimal places. To be absolutely precise, the unemployment rate for July was 3.458%. That’s the lowest unemployment rate since May 1969.

  I was impressed with how broad the jobs gains are. For example, leisure and hospitality added 96,000 jobs last month. Of that, 74,000 was in bars and restaurants. This is an important number to watch because that sector has been a laggard since the lockdowns. It’s still 7% below the high from early 2020. It’s a good sign that more people are going out.

  Professional and business services added 89,000 jobs last month. This is a sector that hasn’t been impacted as much as many others. It’s up nearly a million jobs since pre-Covid.

  The public sector added 57,000 jobs last month, mostly teachers. The only major industry to lose jobs last month was auto manufacturing, which lost 2,200 jobs.

  The labor force participation rate slipped a bit in July. This is important because we want to see how many people are looking for work. If you’ve given up looking, then the government doesn’t count you as unemployed. Labor force participation has mostly improved over the last two years, but it needs to go even further.

  A better measure of the labor force participation rate is to look at prime working-age people (ages 25 to 54). That’s improved over the last two years, but it’s not quite where it was prior to the recession of 2020.

  For the most part, the stock market didn’t do much of anything in the wake of this report. During the day yesterday, the S&P 500 reached its highest point in three months. However, it gave that back by the closing bell.

  The index has now fallen for the last four days, but it’s been modest losses. The next big test for the market comes tomorrow when the government releases the inflation report for July. This will be important because it will be the first report that includes the recent drop in oil prices.

  This raises an interesting topic: how does the unemployment rate impact the stock market? A few years ago, I looked at the numbers. I took all the monthly unemployment rates since 1948 and saw how the market performed in those months.

  I then divided the months into four groups based on the current unemployment rate. The four groups were under 4%, 4% to 6%, 6% to 8% and over 8%. This is the S&P 500’s annualized price return by unemployment rate since 1948:

  Under 4%: +4.71%
  4% to 6%: +7.83%
  6% to 8%: +18.09%
  Over 8%: +22.17%

  This makes sense. The best time to invest is when the economy is in rough shape. Meanwhile, when the economy is humming along is a good time for the bears to strike. I should caution you against reading too much into this kind of analysis. The market is made up of people and it’s only as rational as its most impassioned trader. As long as inflation weighs on the market, investors will be nervous.

  The price for oil is a very important piece of the monthly CPI report. According to GasBuddy, the average price for gasoline peaked at just over $5 per gallon in mid-June. Since then, it’s fallen consistently and gasoline in now under $4 per gallon.

  

  The inflation report for June showed that consumer prices rose by 9.1% over the prior 12 months. In simple terms, for every $11 dollars you had one year ago, today you have the buying power of $10. The core rate, which excludes food and energy, is “only” up 5.9% over the past year. That 12-month core rate has gradually ticked down over the last three months. I’ll be curious to see if it hits four months in a row.

  I suspect that the jobs numbers will soon slow down. That’s a result of the higher interest rates from the Fed. Ultimately, that will reduce demand. That will force companies to cut costs, and an easy way to do that is to hold back on hiring new people.

  We’re nearly finished with the Q2 earnings season, and it’s been a decent one. For now, the S&P 500 is on pace to record earnings growth of 9.63% compared with last year’s Q2. The energy sector is looking to quadruple its profits over last year. The big loser is the consumer discretionary sector which is down 14.23% over last year. So far, 76.0% of companies have beaten expectations, although those are much-reduced expectations.

  The Federal Reserve doesn’t meet again until late September. Thanks to Friday’s jobs report, Wall Street is expecting another 0.75% rate increase. After that, however, the outlook gets cloudy.

  Traders expect 0.25% hikes in November and December. Then begins a long pause. Traders expect the Fed to hold its target range at 3.50% to 3.75% for the entire first half of next year. They see a rate cut by July as a 50-50 bet. It’s extraordinary that investors expect a U-turn in Fed policy so quickly.

  Stock Focus: Waters Corporation

  I wanted to update you on a stock I’ve discussed before, Waters Corporation (WAT). I like this company a lot. Even though it’s not well-known to investors, Waters is one of the world’s leading specialty measurement companies.

  The company was founded in 1958 by James Waters. He passed away last year at the age of 95. Waters got his big break in 1972 when he solved a complicated problem for Robert Woodward, a Nobel Prize-winning chemist at Harvard. Waters went to Woodward’s lab with a liquid chromatograph and helped solve the problem within a few weeks.

  Waters is headquartered in Milford, Massachusetts. After 74 years, it’s become a pretty big outfit. The company currently has over 40,000 customers and a workforce of 7,800 employees. Waters went public in 1995 and the shares are up 86-fold since then. This year, Waters is on track to register nearly $3 billion in revenue. The current market cap is $19.5 billion. Waters is also a member of the S&P 500.

  So what do they do? The company makes, sells and services high-performance liquid chromatographs, ultra-performance liquid chromatographs and mass spectrometers. Waters operates through two segments, Waters and TA (for thermal analyzers).

  If you’re like me, then you probably rarely find yourself in the market for a spectrometer. Or maybe never. But there are lots of businesses who love them and buy them. But what do these things do? Spectrometers help identify chemical compounds. This is important for drug development, food testing, and air and water quality testing. Waters also designs and sells thermal analysis, rheometry and calorimetry instruments through its TA product line.

  This is normally a very good business to be in. Waters has a high “moat” which means it’s well-protected from competitors. That’s the kind of company I like to buy. Waters often delivers operating profit margins near 30%.

  Check out its long-term performance:

  

  A sign of a good long-term chart is when you can barely make out the numbers for the Y-axis.

  Being a growth stock, shares of Waters got beaten up in recent months. The stock peaked at $428 per share about this time last year. By the time of its recent low in April, Waters had shed $140 per share.

  Despite the drop, Waters has continued to deliver very good earnings. Waters earned $11.20 per share last year. Wall Street expects earnings of $12.08 per share for this year and $13.18 per share in 2023. Last week, Waters reported another solid quarter. For Q2, Waters made $2.75 per share which beat the Street by nine cents per share.

  Let’s look at guidance. The company said it expects earnings to range between $2.50 and $2.60 per share for Q3. For the full-year, Waters said to expect earnings between $11.95 and $12.05 per share. That’s almost certainly too low. I’d say that $12.20, give or take, is more accurate.

  I used to think that Waters was overpriced but the recent selloff has made the stock much more attractive. This is one I’m going to be taking a close look at when it’s time to update our portfolio at the end of this year.

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

  – Eddy

• Morning News: August 9, 2022
  Eddy Elfenbein, August 9th, 2022 at 7:05 am

  People Flock to South Korean Crypto Event Despite Market Turmoil

  Treasury Dept. Blacklists Crypto Platform Used in Money Laundering

  One of the Decade’s Hottest Bond Markets Is Imploding in China

  U.S. Solar Shipments Are Hit by Import Ban on China’s Xinjiang Region

  U.S. Lawmakers Look to Digital Dollar to Compete With China

  Rapid Wage Growth Keeps Pressure on U.S. Inflation

  Electric Cars Too Costly for Many, Even With Aid in Climate Bill

  Home Inventory Soars at Record Rate With US Buyers Pulling Back

  We Will All End Up Paying for Someone Else’s Beach House

  Data Show Gender Pay Gap Opens Early

  Axios Agrees to Sell Itself to Cox Enterprises for $525 Million

  Pfizer Agrees to $5.4 Billion Deal for Global Blood Therapeutics

  Domino’s Pizza Quits Italy After Locals Shun American Pies

  BlackRock Opening ‘Snowbird Office’ in Miami for Dozens of Staffers

  Carlyle’s Billionaire Founders Reached a Breaking Point With CEO

  Roman Abramovich’s London Empire Unravels as Sanctions Bite

  Farewell, Years-Long GOP Effort to Help the Wealthy Not Pay Taxes

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• Trex Earns 79 Cents per Share
  Eddy Elfenbein, August 8th, 2022 at 4:19 pm

  After the close, Trex (TREX) reported fiscal Q2 earnings of 79 cents per share. Wall Street had been expecting 67 cents per share.

  Sales rose 24% to $386 million. That was just above the company’s own range of $375 million to $385 million. EBITDA is up 41% to $129 million.

  “Trex executed effectively on our wood-to-composite market share conversion strategy during the second quarter as consumers continued to invest in enhancing their outdoor living experience. Revenue increased 24%, aided primarily by favorable pricing as well as mid-single digit growth in volume at Trex Residential, reflecting both consumer demand and continued distributor inventory build, particularly in the pro channel. We delivered strong EBITDA margins in the second quarter as a result of our pricing, favorable mix, focused cost reduction efforts and production efficiencies, enabling us to successfully offset ongoing raw material and logistics inflationary pressures, while we continued to invest in our brand. Supported by our strong free cash flow, we repurchased 2.8 million shares of our outstanding common stock during the quarter, which we believe will provide long-term benefits to our shareholders,” said Bryan Fairbanks, President and CEO of Trex.

  During the quarter, Trex bought back 2.8 million shares for an average price of $60.39 per share. They still have 4.3 million left in the current authorization.

  Trex said it expects a significant slowdown in business for the rest of this year. Trex sees Q3 revenue of $185 million to $195 million, and Q4 between $180 million and $190 million.

• On Pace for a Three-Month High
  Eddy Elfenbein, August 8th, 2022 at 11:07 am

  The stock market is up again this morning. The S&P 500 is on place for its highest close in more than three months. There’s still a long way to go to get back to the high-water mark from January. So far this morning, the S&P 500 has been as high as 4,186.62. It hasn’t been this high since May 5.

  Thanks to the strong jobs report, Wall Street is leaning towards a 0.75% rate increase from the Fed next month, followed by 0.25% increases in November and December. Traders still expect an initial rate cut by the middle of next year. The Fed meets again on September 21.

  We’re heading towards the close of earnings season but there are still several reports left to go. The S&P 500 is currently on pace for earnings growth of 9.63%. Some of the popular meme stocks are back again. Shares of Bed Bath & Beyond (BBBY) are up more than 40% this morning. For Q2, profits from the energy sector are on pace to quadruple last year’s.

  Trex (TREX) is due to report after the close. Wall Street expects earnings of 67 cents per share.

• Morning News: August 8, 2022
  Eddy Elfenbein, August 8th, 2022 at 7:06 am

  Can Global Shipping Be Fixed? One Regulator Will Try

  Russia Keeps Investors from ‘Unfriendly’ Nations Frozen Out

  World’s Biggest Miner Rebuffed on $5.8 Billion Copper Play

  Indonesia Says Tesla Strikes $5 Billion Deal to Buy Nickel Products

  How This Economic Moment Rewrites the Rules

  In an Unequal Economy, the Poor Face Inflation Now and Job Loss Later

  Hiring Gets Easier for Some Employers Despite Hot Job Market

  The Market Read the Federal Reserve All Wrong

  Senate Passes Democrats’ Climate, Healthcare and Tax Bill

  Antitrust Bill Targeting Big Tech in Limbo as Congress Prepares to Recess

  How YouTube Keeps Broadcasting Inside Russia’s Digital Iron Curtain

  Carlyle CEO Resigns in Sudden Reversal of Generational Shift

  Mitsui Sumitomo Insurance to Buy U.S. Reinsurance Broker for $400 Million

  CVS Plans to Bid for Signify Health

  Why HBO Max Spent $130 Million to Shelve ‘Batgirl’ and ‘Scoob 2’

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• Morning News: August 5, 2022
  Eddy Elfenbein, August 5th, 2022 at 7:03 am

  Japan’s GPIF Posts $28 Billion First-Quarter Investment Loss on Market Turbulence

  Gloomy About the Economy and Inflation, Americans Remain Upbeat About Jobs

  The Vibes in the Economy Are … Weird. Really Weird.

  Pimco Clients Pull $29 Billion as Rate Hikes Hit Bond Funds

  Crypto Companies Are Spending $2.4 Billion on Sports Sponsorships

  After Losing Favor to Electric Cars, Plug-In Hybrids Gain Ground

  The Great American Road Trip Is Almost Electric

  How Deadbeat Landlords are Fueling Housing Crisis by Evading Taxes

  Facebook Parent Meta Set to Raise $10 Billion in Bond Debut

  Musk Says Twitter Committed Fraud in Dispute Over Fake Accounts

  Warner Bros. Discovery Weighs Free Ad-Supported Streaming Plan

  DoorDash Revenue Climbs as Restaurants Raise Prices, Consumers Continue Spending

  Beef Prices are Poised for a Surge that Could Last Years, Experts Say

  Beyond Meat Plans to Lay Off 4% of Global Workforce

  AMC Plans to Issue 517 Million Shares of Preferred Stock, Under the Ticker Symbol ‘APE’

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• Morning News: August 4, 2022
  Eddy Elfenbein, August 4th, 2022 at 7:06 am

  Big Tech Is the West’s Surprise Weapon in Competition With Russia, China

  Copper Worth Nearly Half a Billion Dollars Goes Missing in China

  Japan Once Led the World in Microchips. Now, It’s Racing to Catch Up

  Russian Oil Cap Push Faces Doubts From Energy, Finance Industry

  Stockholm Instead of Rome? October Instead of July? How Heat Waves Are Changing Tourism in Europe

  The Bank of England Raises Rates by a Half-Point, Biggest Increase in 27 Years

  Brazil’s Central Bank Raises Selic Lending Rate to 13.75%, Considers Increase in September

  Labor Hoarding Holds Key to How Severe a US Recession May Get

  A Recession-Proof Plan for Your Money

  Wall Street Bonuses Poised to Plunge Following Slowdown in Deals

  Companies From Google to Pepsi Are Boosting Capital Spending

  Netflix Is Scrambling to Learn the Ad Business It Long Disdained

  Disney World Prices Up 3,871% In 50 Years — More Than Wages, Rent and Gas

  How a Little-Known Stock Soared 21,000% to Overtake Costco

  How a Celebrity CEO’s Rule of Fear Helped Bring Down Hot Startup Zilingo

  MicroStrategy Founder Michael Saylor Once Lost $6 Billion in a Day. His Big Bet on Bitcoin Might Sink Him Once and for All

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• Miller Industries Earned 33 Cents per Share for Q2
  Eddy Elfenbein, August 3rd, 2022 at 4:26 pm

  Miller Industries (MLR) announced financial results for the second quarter ended June 30, 2022.

  Net sales were $201.5 million, an increase of 11.2%, and net income was $3.8 million, or 33 cents per diluted share. That’s down 42% from last year.

  Gross profit for the second quarter of 2022 was 9.1% of net sales, compared to 11.4% of net sales, for the second quarter of 2021. Selling, general and administrative expenses were $12.7 million, or 6.3% of net sales, compared to $12.0 million, or 6.6% of net sales, in the prior year period.

  Miller Industries also announced a quarterly cash dividend of $0.18 per share, payable September 12, 2022, to shareholders of record at the close of business on September 5, 2022, the forty-seventh consecutive quarter that the Company has paid a dividend.

  “Supply chain issues persisted during the quarter, however, despite this, we were pleased with our ability to improve profitability as we navigate these challenging times,” said William G. Miller, II, Chief Executive Officer of the Company. “We continued to experience issues securing certain parts, which impacted the amount of finished goods we could deliver and our overall revenue growth. That said, the price increases we enacted through the first and second quarters of 2022 have begun to take effect and, as a result, profitability improved sequentially in the quarter, despite a slightly unfavorable product mix that impacted our consolidated gross margin.”

  Mr. Miller, II continued, “We continue to be extremely encouraged with the demand for our products and how this contributes to the continued strength in our backlog, as our backlog grew substantially in the second half of 2021 and has remained very stable to date in 2022. To meet this demand for our products, we are continuing our strategy of accumulating available inventory to service customers and quickly complete and deliver finished goods as soon as part sourcing allows, all while keeping disciplined capital allocation as a top priority. In the meantime, we will continue to focus on improving operational efficiency, mitigating inflationary impacts, providing excellent service to our customers, and delivering value for all stakeholders.”

  “Although supply chain pressures are ever present in both our North American and foreign markets, we remain optimistic about our business’ long-term fundamentals. We have yet to see any significant slowdown in demand, despite the ongoing conflict in Ukraine. While the consequences of the war between Russia and Ukraine, and its ultimate effect on our business, are difficult to predict, we are encouraged by initial demand signals and the fact that the conflict has had limited impact on our European operations thus far,” concluded Mr. Miller, II.

• The Market Rallies on Positive Economic Data
  Eddy Elfenbein, August 3rd, 2022 at 11:00 am

  The stock market is turning back its two-day slide from earlier this week. So far, many of the aggressive stocks are doing well. For example, the Nasdaq is leading the S&P 500 this morning by one full percentage point.

  James Bullard, the top guy at the St. Louis Fed, said he sees more rate hikes this year. He added that we’re not in a recession and he projects rate increases of 1.5% left to come this year.

  His comments have been the latest in a string of remarks from Fed officials adopting a more hawkish tone. The market started to rally in the middle of last week as Jerome Powell’s comments were seen as more dovish.

  We also got some surprisingly strong economic data this morning. The ISM Non-Manufacturing Index was 56.7. That beat expectations of 54. Also, the factory orders report showed an increase of 2%. Economists were expecting 1.2%.

  After the close, we’ll get earnings reports from FICO (FICO) and Miller Industries (MLR). Of course, the big jobs report is due out on Friday morning.

• Morning News: August 3, 2022
  Eddy Elfenbein, August 3rd, 2022 at 7:00 am

  Congress Is Giving Billions to the Chip Industry. Strings Are Attached.

  As US Eyes New China Chip Curbs, Turmoil Looms for Global Market

  Dollar Jumps Vs. Yen as Fed Officials Hint More Rate Hikes Coming

  As Russia Threatens Europe’s Energy, Ukraine Braces for a Hard Winter

  The End of Snow Threatens to Upend 76 Million American Lives

  There’s a Miracle in Washington, and It’s All About Taxes

  Who Will Listen To These Truckers?

  CEOs Ditch the Warm Talk as Economy Cools

  Crypto Takes a New Hit as Thousands of Solana Wallets Hacked

  Nomura’s 97% Profit Drop Adds Urgency to Plans to Shift Away From Trading

  SocGen Targets Higher Revenue With Boost From Rising Rates

  Southwest Made It Easier to Use Travel Credits. Will Other Carriers Follow?

  Profits Slump at CNN as Ratings Plummet

  New York Times Reports a Gain of 180,000 Digital Subscribers

  Forbes Explores Sale After SPAC Deal Collapses

  Robinhood Lays Off 23% of Staff as Retail Investors Fade From Platform

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