Archive for September, 2022

• This Morning’s August PCE Report
  Eddy Elfenbein, September 30th, 2022 at 11:28 am

  This morning, the government released the Personal Consumption Expenditure stats for August. This report gets attention because the PCE is the Fed’s preferred measure of inflation.

  The core PCE number rose by 0.6% in August which was 0.1% higher than estimates. Over the past year, core PCE rose by 4.9%. Wall Street had been expecting 4.7%.

  The non-core rate rose by just 0.3% in August. Falling energy prices played a big role in keeping that number low. Either way, the annual numbers are running well above the Fed’s target of 2%.

  Lael Brainard, the Vice Chair of the Fed and someone who is considered more of a dove, nevertheless spoke in strong terms regarding inflation:

  “Monetary policy will need to be restrictive for some time to have confidence that inflation is moving back to target,” the central bank official said in remarks prepared for a speech in New York. “For these reasons, we are committed to avoiding pulling back prematurely.”

  The stock market is up so far today but it looks to close out a difficult week, month and quarter.

• Morning News: September 30, 2022
  Eddy Elfenbein, September 30th, 2022 at 7:03 am

  India’s Central Bank Calls Aggressive Monetary Policy a Shock to Global Economy

  China’s Service Sector Slows in Latest Economic Warning Sign

  Eurozone Inflation Hits Record 10% Amid Energy Crunch

  Pound Drops After Reports UK Won’t Speed Up Watchdog Forecast

  Britain’s Gamble on Tax Cuts Has Economists Warning of Past Mistakes

  U.S. Penalizes Chinese Companies for Aiding Iran’s Oil Exports

  Even as Oil Prices Ease, U.S. Keeps Tapping Strategic Reserve

  Bonds May Be Having Their Worst Year Yet

  One of the Hottest Trends in the World of Investing Is a Sham

  High Interest Rates Were Just What Bonkers Housing Needed

  Drought in U.S. West Leads Farmers to Look Elsewhere for Revenue

  Why Are Companies Still Hiring When GDP Is Shrinking?

  Apple’s Tech Supply Chain Shows Difficulty of Dumping China

  China’s Challenger to Boeing and Airbus Clears Major Hurdle

  Nike Shares Tumble After It Reports 44% Surge in Inventories

  India Markets Regulator to Restart Review of $440 Million Digit Insurance IPO

  Texts Released Ahead of Twitter Trial Show Elon Musk Assembling the Deal

  Be sure to follow me on Twitter.

• Morning News: September 29, 2022
  Eddy Elfenbein, September 29th, 2022 at 7:06 am

  Developing Countries Face Stiff Economic Headwinds, World Bank Chief Says

  Sabotaged Pipelines and a Mystery: Who Did It? (Was It Russia?)

  LME to Discuss Banning Russian Metal, Sources Say

  Truss’s ‘Fairy Tale’ Economics Plunge UK Into a Market Nightmare

  To Calm Markets, Bank of England Will Buy Bonds on ‘Whatever Scale Is Necessary’

  Pound’s Swoon Echoes Declines in British Power, Past and Present

  Return of Inflation Makes Deficits More Dangerous

  The Unstoppable Dollar Is Wreaking Havoc Everywhere But America

  With Everything Else Falling, Cash Is Back

  FOMO Helped Drive Up Housing Prices in the Pandemic. What Can We Expect Next?

  Business Groups Sue CFPB Over Antidiscrimination Guidelines

  Tech IPO Market Faces Worst Year Since Global Financial Crisis

  Porsche Rises in Landmark IPO to €75 Billion Valuation

  Chevron Sells Global Headquarters, Pares Back in California Amid Texas Expansion

  McDonald’s Will Have Adult Happy Meals this October

  How McKinsey Got Into the Business of Addiction

  MacKenzie Scott, Billionaire Philanthropist, Files for Divorce

  Be sure to follow me on Twitter.

• Morning News: September 28, 2022
  Eddy Elfenbein, September 28th, 2022 at 7:05 am

  BOE Steps Back Into Bond Market to Restore Stability

  Pound’s Crash Creates Accidental Student-Loan Currency Traders

  On Portugal’s ‘Bitcoin Beach,’ Crypto Optimism Still Reigns

  Consumer Moods Improved in September as Gasoline Prices Fell

  10-Year Treasury Yield Tops 4% for the First Time in 14 Years

  Larry Summers Says Hard Landing ‘Substantially More Likely’

  Texting on Private Apps Costs Wall Street Firms $1.8 Billion in Fines

  U.S. Mortgage Interest Rates Jump to 6.52%, Highest Since Mid-2008

  Apple Ditches iPhone Production Increase After Demand Falters

  Meta Removes Chinese Effort to Influence U.S. Elections

  U.S. Companies Are Reshoring Jobs From China at Record Levels

  EV Tax Credits to Spur More Vehicle Sales Are Entering a Critical Phase

  The Long Road to Driverless Trucks

  Best Buy, Home Depot Lock Up Goods to Fight Theft

  Alzheimer’s Drug Slows Disease Progression in Trial

  GM Delays Return-to-Office after Employee Uproar: ‘General Motors is Doomed’

  The 400 Richest People In America

  Be sure to follow me on Twitter.

• CWS Market Review – September 27, 2022
  Eddy Elfenbein, September 27th, 2022 at 6:29 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 Stock Market Plunges to a 21-Month Low

  Alas, the bear market is still with us. The S&P 500 fell on Tuesday for the sixth day in a row. Four of those times, the market lost more than 1%. In the last 11 sessions, the market has lost more than 11%. Yuck!

  The S&P 500 finished Tuesday at its lowest level since December 14, 2020. Today was actually the market’s best day of the last six with a loss of only 0.21%. The S&P 500 has now traded below its 200-day moving average for over 110 days in a row. That’s one of the longest such streaks in the last 15 years.

  

  During the summer, the stock market staged an impressive rally. The S&P 500 gained more than 17% in two months. Was the bear market finally over? Frankly, I was skeptical. Bear-market rallies exist to lure us back in and convince us that things are safe, only to then slam the door on us. Well, that’s exactly what happened.

  In just six weeks, we gave the entire summer rally back. Not only did the S&P 500 break below its June low but the Dow Jones dropped below its pre-Covid high from 31 months ago—and I’m not adjusting for the impact of inflation, which is running at close to 14% over the last two years.

  Earlier today, the S&P 500 dropped below its intra-day low from June 17. Previously, that had been the low point of the bear market, until today. This has been a terrible year for stocks.

  It’s not some giant mystery what’s going on. The issues that first spooked the market are still with us. The last inflation report was surprisingly high. Core inflation doubled expectations. We also know that the Federal Reserve is committed to raising interest rates to fight inflation.

  Last week, the Fed hiked interest rates by 0.75%. That was its third 75-point hike in the last three meetings. According to the futures market, we should expect a fourth 0.75% hike in November, just a few days before the mid-term elections. The futures market sees the Fed funds target range getting to a high of 4.50% to 4.75% in less than six months from now. That’s what’s hanging over the entire market.

  To give you an idea of how much things have changed, two years ago, the yield on the three-year Treasury was going for 0.1%. Today, the yield hit 4.39%. In fact, the one-year yield had previously been the highest-yielding Treasury. The highest-yield crown has been passed to the three-year Treasury. In simple terms, that means the market sees interest rates staying higher for longer. I think the market is right on that.

  

  This gets to the heart of what interest rates do to stocks. Higher interest rates are like kryptonite to the stock market. It’s a double whammy effect. For one thing, it cuts into profits because it raises borrowing costs. That makes it more expensive to fund operations or expansion plans. Higher rates also make it more difficult for consumers to buy large-ticket items like houses or cars. The average adjustable-rate mortgage payment has rocketed higher over the last year.

  The Q3 earnings season will start in about two weeks. Wall Street analysts have been busily lowering their earnings estimates. Again, that’s what higher rates do.

  There’s also the competition factor. Just looking at where we stand in the market, I’m sure there are investors who would prefer to sit out this market and relax in a 4.3% Treasury for a year or so. Sure, it’s not a big gain, but at least you don’t have to worry about the market’s frenetic volatility. It’s not for me, but I understand why some people would happily go for it. Who needs the headache?

  The bond market has been a trainwreck as well. Bloomberg notes that the 10-year yield is up 235 basis points this year. That’s the most since the data goes back to, 1962.

  Higher rates means that lower earnings are discounted at a faster rate. That adds up to lower share prices. Historically, stocks have not done well during rising rate environments. Interestingly, it’s not necessarily the overall level of interest rates. Rather, it’s the direction of rates.

  When rates go down, the process works in reverse. Borrowing costs are lower and that puts less pressure on balance sheets. Also, it forces investors to bear more risk in the stock market. Bear in mind how willing investors were to invest in any kind of high-risk venture (meme stocks, crypto, NFTs) when rates were near 0%. That’s all changed. AMC Entertainment (AMC) is down about 60% this year.

  I won’t be completely satisfied until we start seeing interest rates come down. That could happen sooner than expected. If we see more evidence that the economy is slowing down and inflation has been put back in its box, then there will be pressure on the Fed to cut rates. The futures market sees a decent shot of that happening sometime in 2023.

  The tough part about this is that market bottoms often come during extreme pessimism. The typical environment for a market low comes during a slow economy, lower earnings, higher unemployment and interest rates that are believed to be too high.

  This is why I caution investors against trying to time the market. Bernard Baruch famously said, “Don’t try to buy at the bottom and sell at the top. It can’t be done, except by liars.”

  I’d add, “or on Twitter.”

  It’s been a tough time to be a mega-zillionaire. Forbes reports that the largest tech billionaires have lost $315 billion in the past year. Shares of Meta Platforms (META), formerly known as FaceBook, plunged to another fresh 52-week low today. The stock is down over 62% from its high. META is now going for about 12 times next year’s earnings (assuming those estimates are accurate). Mark Zuckerberg is, apparently, no longer one of the richest 10 Americans. (My sympathies.)

  Low Vol Vs. High Beta

  More seriously, the selloff has had a very unequal effect on the stock market. I like to look at the relative performance of the S&P 500 Low Volatility Index versus the S&P 500 High Beta Index. In short, these are indexes of safe stocks versus risky stocks. It’s not that one group is in any sense better than the other. Instead, we can see how investors change what they want.

  Consider these stats: From March 19, 2020 to November 8, 2021, the S&P 500 Low Vol Index gained more than 42%, but the High Beta Index zoomed 220%. When the Fed lowered rates to the floor, taking on risk was a no-brainer, and it paid off handsomely.

  But then things started to change. It’s interesting that the market started to shift last November, several months before the Fed’s first rate cut. (When in doubt, pay attention to what prices say before what government officials say.)

  Since November 8 of last year, the Low Volatility Index has lost 7.7% but the High Beta Index is down 28.8%. The equation is simple. Higher rates make investors more conservative. Lower rates make them willing to take on more risk. The effect has been especially acute lately.

  

  One thing I’ve learned from many years of being a professional investor is that market trends can last longer than you thought possible. While I caution against trying to time the market’s low point, one major benefit of a bear market is that it gives us some bargains. We don’t fully realize how cheap some starts are right now. Shelby Cullom Davis said, “You make most of your money in a bear market; you just don’t realize it at the time.”

  A good example is Altria Group (MO), the tobacco company. I understand that some investors prefer to avoid tobacco stocks, but my point here is about the stock’s risk profile.

  A few weeks ago, Altria raised its quarterly dividend from 90 to 94 cents per share. There’s an implied promise, though not official, that once a company raises its dividend, it is committed to keeping it there unless the business outlook severely deteriorates.

  Altria’s dividend works out to a yearly dividend of $3.76 per share, and that dividend appears to be safe. Altria is expected to earn $4.85 per share this year and $5.09 per share next year.

  Here’s what’s important: Shares of MO hit a new 52-week low today. At Tuesday’s closing price, the dividend yield comes to 9.2%. Sometimes when you see unusually high dividend yields, that’s because the market is assuming a dividend cut is on its way. That doesn’t appear to be the case with Altria. Folks are just plain scared of stocks.

  I’m not recommending Altria, but I want to show you how rattled the market is. Look at Citigroup (C). The stock is going for six times next year’s earnings. This is a good time to be a stock-picker. You just need some patience.

  What the Soaring Dollar Means for Investors

  One important effect of the Fed hiking up rates is that it’s making the U.S. dollar more attractive. Money likes to go where it’s treated best and right now, that’s in the USA.

  The strong dollar has a benefit and a cost. While it helps the purchasing power of Americans, it also helps accelerate inflation in other countries.

  Earlier this week, in the U.K., investors were scared by the government’s tax cut plans. That led the British pound to hit a 37-year low against the greenback. China has had a tamer response. The government keeps a tight leash on the foreign exchange rate, but it let the dollar rise modestly.

  

  Since the dollar is the world’s reserve currency, its impact is hard to escape. An estimated 40% of the world’s transactions are done in dollars, whether the U.S. is involved or not.

  When currencies are traded, the trade isn’t usually from currency A to currency B. Instead, it goes from currency A to the dollar, then from the dollar to currency B. That’s how ubiquitous the dollar is.

  There’s also a geopolitical angle. With a global pandemic and supply chain issues plus the war in Ukraine, the dollar has acted as a safe haven for investors around the world. A few months ago, the euro reached parity against the dollar for the first time in 20 years.

  However, one disturbing side effect is that the strong dollar pushes up the cost of food and medicine in developing countries. As bad as the economic outlook is for the United States, it’s still better than for many other countries.

  One fear of the strong dollar is that it creates a reinforcing cycle, the “Doom Loop.” As things get bad, investors flee to the dollar. In turn, the strong dollar hurts other countries, which further aids the dollar. The cycle could get worser and worse.

  Sometimes a weak currency can help soften problems for a country as it helps them import less and export more. I was recently traveling in Asia, and I was surprised how inexpensive things were to someone used to American prices. Lately, however, I don’t know if countries with weaker currencies are experiencing much of a lift.

  These problems especially impact poorer countries who often need to pay back loans that are denominated in dollars. The exchange rate can make already dire problems even worse.

  Eventually a strong dollar can hurt American businesses. It holds back exports, and it will impact the repatriation of profits made overseas. During the Q3 earnings season, we’re going to hear a lot more about how companies would have done much better, if it had not have been for that pesky strong dollar.

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

  – Eddy

  P.S. If you want to learn more about the stocks on our Buy List, please sign up for our premium service. It’s $20 per month, or $200 per an entire year.

• Morning News: September 27, 2022
  Eddy Elfenbein, September 27th, 2022 at 7:00 am

  China Reins In Its Belt and Road Program, $1 Trillion Later

  Energy Crunch Will Hurt Like 2009 Crash If Europe Gets It Wrong

  An Israel-Lebanon Border Deal Could Increase Natural Gas Supplies

  ECB’s Centeno Sees Higher Inflation Than Expected and Cycle of Rate Hikes Continuing

  The Dollar Is Strong. That Is Good for the U.S. but Bad for the World.

  Lumber Prices Fall Back to Around Their Pre-Covid Levels

  Goldman and BlackRock Sour on Stocks as Recession Risk Rises

  Gundlach Starts Buying After Worst US Treasury Rout in Decades

  Why CEOs From Coca-Cola to Hershey Are Talking About ‘Price Elasticity’

  TikTok Seen Moving Toward U.S. Security Deal, but Hurdles Remain

  Biden To Announce New Rule Requiring Airlines To Disclose “True Cost” Of Plane Tickets

  U.S. Suit Over Alliance of American Airlines and JetBlue Goes to Trial

  Are You Tempted to Buy AMC’s New APEs? Be Prepared to Lose Everything, the Company Warns

  Google’s Low-Tech Plan to Solve the Opioid Crisis

  Biogen Agrees to Pay $900 Million to Settle Lawsuit Over Kickbacks

  Crypto Fugitive Do Kwon Says He Isn’t Hiding From Authorities

  Be sure to follow me on Twitter.

• The British Pound Plunges to a 37-Year Low
  Eddy Elfenbein, September 26th, 2022 at 10:55 am

  The British pound is getting clobbered today. The pound is currently plunged to a 37-year low today against the U.S. dollar. What’s happening is that financial markets are taking in the news of the large tax cuts that the government is planning. These could be the largest cuts in 50 years. At one point, the pound was below $1.04, and it fell to £1.12 versus the euro.

  There seems to be a push-pull effect going on for the U.K. economy. The Bank of England is raising rates at the same time that the government is injecting stimulus. Larry Summers, the former Treasury Secretary, said, “The UK is behaving a bit like an emerging market turning itself into a submerging market.”

  

  The British 10-year bond yield got to 4.15%. That’s double where it was six weeks ago. Summers said, “I think Britain will be remembered for having pursued the worst macroeconomic policies of any major country in a long time.” Yikes!

  For their part, the Chinese government isn’t willing to fight the dollar. The government let the dollar rise to 7-to-1 versus the renminbi. China’s central bank keeps a tight leash on their exchange rate.

  The pound doesn’t appear to be impacting our markets very much. As I write this, the S&P 500 is up a little bit. Interestingly, the higher yielding areas of the market like utilities and REITs are down the most.

• Morning News: September 26, 2022
  Eddy Elfenbein, September 26th, 2022 at 7:01 am

  Russia’s War in Ukraine to Cost Global Economy $2.8 Trillion, OECD Says

  China Lets Its Currency Weaken Past a Psychological Barrier

  Tories Look to BOE to Step In to Halt Panic Over the Pound

  Central Banks May Stoke Risks by Raising Interest Rates Together

  Interpol Issues Red Notice for Terra’s Do Kwon, Korea Says

  Tech Stocks Face Another 10% Drop or More as Strong Dollar Hits Profits

  Hedge Funds Dashed to Exit Energy Positions Last Week, Bank Data Show

  John Paulson on Frothy US Housing Market: This Time Is Different

  Whatever Happened to the Starter Home?

  New York City’s Empty Offices Reveal a Global Property Dilemma

  Factory Jobs Are Booming Like It’s the 1970s

  Small Businesses Get Creative as They Still Struggle With Hiring

  A Sweeping Plan to Fix Everything Still Wrong With Student Debt

  TikTok Seen Moving Toward U.S. Security Deal, but Hurdles Remain

  Amazon, Berkshire Hathaway Could Be Among Top Payers of New Minimum Tax

  American, JetBlue to Face Off Against Justice Department in Antitrust Trial

  Colonel Sanders’ Historic Restaurant and Mansion Is for Sale — and KFC Isn’t Happy

  Be sure to follow me on Twitter.

• Morning News: September 23, 2022
  Eddy Elfenbein, September 23rd, 2022 at 7:03 am

  Major Covid Holdouts in Asia Drop Border Restrictions

  Japan Intervenes to Prop Up the Sliding Yen

  Truss’s Economic Plan Sends UK Markets Into Meltdown

  Bank of England Says Paper Banknotes Only Good for One More Week

  Bank of Ireland Returns to Full Private Ownership

  Central Banks Accept Pain Now, Fearing Worse Later

  The Era of Inflation Has Ended — for Asset Prices on Wall Street

  Growling Powell Causes Goldman to Cut Its S&P 500 Price Target. Again.

  Some U.S. Firms Wait to Issue Bonds In a Bet Rates Will Come Down

  Bill Ackman Touts Immigration Over Rate Hikes in Inflation Fight

  New York is Still the Top Global Financial Center, Hong Kong Slips

  The Trouble With Butter: Tight Dairy Supplies Send Prices Surging Ahead of Baking Season

  FedEx to Raise Shipping Rates by 6.9% as It Combats Slowdown

  Pandemic Unemployment Fraud Estimate Rises to $45.6 Billion

  Boeing Reaches $200 Million Settlement With Regulators Over Its 737 Max

  Companies Fined $325,000 for Selling Pesticide to Fight Coronavirus, E.P.A. Says

  Be sure to follow me on Twitter.

• Morning News: September 22, 2022
  Eddy Elfenbein, September 22nd, 2022 at 7:05 am

  A Great Copper Squeeze Is Coming for the Global Economy

  Turkey Cuts Interest Rates Again as Country Struggles Under Inflation Exceeding 80%

  Bank of England Unveils Half-Point Hike as Three Push for Bigger Move

  After a Big Rate Increase, Markets Fear a Recession

  Fed Rate Decision Sends U.S. Treasury Yields in Different Directions

  How the Fed’s Rate Increase Will Hit Americans’ Monthly Budgets

  Wall Street CEOs Cautious About Path of U.S. Economy

  U.S. Home Sales and Prices Fell in August as Mortgage Rates Rose

  What’s Next for Profits? Cars Shed Light on a Key Inflation Question

  Is the Hyperloop Doomed?

  FedEx Earnings Report to Detail How Carrier Deals With Lower Demand

  The Sneaky Genius of Apple’s AirPods Empire

  Chief Metaverse Officers Are Getting Million-Dollar Paydays. So What Do They Do All Day?

  Meta Quietly Reduces Staff in Cost-Cutting Push

  Kraken CEO Jesse Powell Stepping Down from Crypto Exchange

  Why Trump’s Alleged Real-Estate Shenanigans Went Too Far

  Marry Now, Pay Later: New Services Put Weddings on Installment

  Be sure to follow me on Twitter.