Archive for November, 2022

• Slow Day Ahead of the Elections
  Eddy Elfenbein, November 7th, 2022 at 10:29 am

  The stock market is starting the week up a little bit. I think most of Wall Street’s attention is focused on tomorrow’s mid-term election. Shares of Meta Platforms (META) are up about 5%. Of course, that’s coming after the stock was severely punished. On Friday, Meta got as low as $88 per share. The Wall Street Journal said the company could begin large-scale layoffs this week.

  There’s not much economic news today but there will be a few Fed speakers. Cleveland Fed President Loretta Mester and Boston Fed President Susan Collins will speak about women in economics. Richmond Fed President Tom Barkin will speak on inflation. The futures market currently sees the Fed raising its target range for the Fed funds rate to 5.00 to 5.25% next year.

  Reynolds Consumer Products (REYN) is up 1.6% today. The company is due to report its earnings tomorrow morning. Wall Street expects 23 cents per share.

• Morning News: November 7, 2022
  Eddy Elfenbein, November 7th, 2022 at 6:28 am

  China’s Exports Drop Sharply as Global Economy Slows

  China’s Business Elite Sees the Country That Let Them Thrive Slipping Away

  India’s Top Court Backs Modi’s Job Quota for ‘Economically’ Poor

  Japan Extra Budget Said to Lift Bond Issuance by $34 Billion

  Insurer That Sparked Perpetual Bond Selloff Will Repay After All

  Mexico’s Pemex Had a Plan to Fix Its Flaring Problem, but Abandoned It

  COP27 Latest: Macron Tells US, China to Pay for Climate Change

  Energy Sticker Shock Grabs Spotlight Before Midterms

  Despite What You’re Told, There Are No ‘Bubbles’ and Certainly No ‘Fed Bubbles’

  Goldman Cuts S&P 500 Earnings Estimate, Citing Margin Headwinds

  The Shadow Is Born: How the Fed Helped Spawn a $23.7 Trillion Market

  Fed ‘Hasn’t Accomplished Anything’ on Labor Market, Dudley Says

  Inflation, Recession Fears Have Some Holiday Shoppers Trading Down

  Big Tobacco Heralds a Healthier World While Fighting Its Arrival

  Activision Insiders Fret $69B Microsoft Merger Could Fall Apart

  Walgreens Unit Close to Roughly $9 Billion Deal With Summit Health

  British Soccer, Brought to You by American Crypto Optimism

  Reality of Irving’s Import to Nike: ‘They Can Drop Him’

  Seizing a Russian Superyacht Is Much More Complicated Than You Think

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• The October Jobs Report
  Eddy Elfenbein, November 4th, 2022 at 8:37 am

  The US economy created 261,000 net new jobs last month. That’s the smallest monthly increase since December 2020. Wall Street had been expecting an increase of 205,000.

  The unemployment rate rose 0.2% to 3.7%. The Labor Force Participation Rate declined for the second month in a row to 62.25%.

  There are 99.9 million Americans who are either unemployed or out of the jobs market entirely.

  In the last year, average hourly earnings are up by 4.7%. That’s the smallest increase in over a year.

  The civilian labor force participation rate for prime working age people is 82.5%.

  Average hourly earnings grew 4.7% from a year ago and 0.4% for the month, indicating that wage growth is still likely to pressure inflation. The yearly growth met expectations while the monthly gain was slightly ahead of the 0.3% estimate.

  Health care led job gains, adding 53,000 positions, while professional and technical services contributed 43,000 and manufacturing grew by 32,000.

  Leisure and hospitality also posted solid growth, up 35,000 jobs, though the pace of growth has slowed considerably from the gains posted in 2021. The group, which includes hotel, restaurant and bar jobs along with related sectors, is averaging gains of 78,000 a month this year, compared to 196,000 last year.

  Heading into the holiday shopping season, retail posted only a modest gain of 7,200 jobs. Wholesale trade added 15,000 while transportation and warehousing was up 8,000.

• Morning News: November 4, 2022
  Eddy Elfenbein, November 4th, 2022 at 7:03 am

  China Stock Frenzy Enters Overdrive on Hopes That Worst Is Over

  China Agrees to Approve BioNTech’s Covid-19 Vaccines for Foreigners, German Chancellor Says

  The Metals for Your EV Are Stuck in a 30-Mile Traffic Jam

  Battle Over Deep-Sea Mining Takes on New Urgency as Trial Run Winds Down

  Why Natural Gas Tankers Are Lining Up Off Europe’s Coast

  World’s Factories Enter the Long Winter

  Five Ways Sanctions Are Hitting Russia

  The Messy Unwinding of the New World Order – in Charts

  El Salvador’s $300 Million Bitcoin ‘Revolution’ Is Failing Miserably

  Workers Expect Fast Inflation Next Year. Could That Make It a Reality?

  Holiday Sales Expected to Increase This Year, But Shoppers Will Lean on Savings and Credit to Afford Gifts

  Trader Arrested in Ibiza Awaits FX Case That’s Dividing Wall Street

  Layoffs Hit Tech Sector With Force as Amazon, Lyft Warn of Economic Downturn

  Twitter Sued for Mass Layoffs by Musk Without Enough Notice

  PayPal Shares Tumble After Forecast Cut, Spending Slowdown Warning

  Starbucks Posts Massive Sales Even as U.S. Inflation Soars

  DoorDash Shares Surge on Stronger-Than-Expected Earnings

  Adidas Dropped Ye, But Sneakerheads Haven’t

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• Morning News: November 3, 2022
  Eddy Elfenbein, November 3rd, 2022 at 7:04 am

  China Is Burning More Coal, a Growing Climate Challenge

  BOE Hikes by 75 Basis Points But Rejects Market Rate Path

  Mystery Whales Baffle Gold Market After Central Bank Purchases

  Fed Makes Fourth Jumbo Rate Increase and Signals More to Come

  Federal Reserve Chief Tells Markets to Focus on Interest-Rate Endpoint

  SEC Pulls In Record Enforcement Haul, Moves to Rewrite Mutual-Fund Rules

  Debt Limit Showdown Looms as White House Braces for a Divided Washington

  Mortgage Rates Too High? (Blame the Fed, Wall Street and Your Neighbor.)

  It’s Harder to Buy a House. This City Fought Back by Outbidding Corporate Landlords

  There Has to Be a Better Way to Lose $800 Billion

  Elon Musk Takes a Page Out of Mark Zuckerberg’s Social Media Playbook

  The Case That Elon Musk Knows Exactly What He’s Doing at Twitter

  Albertsons, Despite Debt, Will Hand $4 Billion to Owners Before Merger

  Blackstone’s $70 Billion Real Estate Fund for Retail Investors Is Losing Steam

  Peloton Drops on Outlook, Even as CEO Says ‘Ship Is Turning’

  Pilots Are Frustrated With Airlines, Too

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• Today’s Policy Statement
  Eddy Elfenbein, November 2nd, 2022 at 2:09 pm

  The Fed raised by 0.75%. Here’s the statement:

  Recent indicators point to modest growth in spending and production. Job gains have been robust in recent months, and the unemployment rate has remained low. Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher food and energy prices, and broader price pressures.

  Russia’s war against Ukraine is causing tremendous human and economic hardship. The war and related events are creating additional upward pressure on inflation and are weighing on global economic activity. 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. In support of these goals, the Committee decided to raise the target range for the federal funds rate to 3-3/4 to 4 percent. The Committee anticipates that ongoing increases in the target range will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time. In determining the pace of future increases in the target range, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments. In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in the Plans for Reducing the Size of the Federal Reserve’s Balance Sheet that were issued in May. The Committee is strongly committed to returning inflation to its 2 percent objective.

  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; Michael S. Barr; Michelle W. Bowman; Lael Brainard; James Bullard; Susan M. Collins; Lisa D. Cook; Esther L. George; Philip N. Jefferson; Loretta J. Mester; and Christopher J. Waller.

  I added the bold which slightly hints that the Fed recognized that the rate-hiking cycle will need to come to an end.

• Morning News: November 2, 2022
  Eddy Elfenbein, November 2nd, 2022 at 7:08 am

  Russia Agrees to Resume Ukraine Grain Export Deal; Wheat Tumbles

  Chinese Stocks Soar as Reopening Talk Fuels Speculative Frenzy

  Chinese Property Bonds Set Record Lows as Investors Lose Faith

  World’s Largest Container Shipping Firm Maersk, a Barometer for Global Trade, Warns of ‘Dark Clouds on the Horizon’

  Fed to Hike Big Again and Open Door to Downshift

  The $24 Trillion Market That Predicts and Influences Interest Rates

  I Bond Investors Just Got a Surprise Boost

  A Mark-to-Market Massacre Is Claiming a $10 Trillion Market

  Your Savings Account Rate Is Now Higher Than Millions of Mortgages

  As Housing Costs Soar, Co-Living Makes a Comeback

  S&P Downgrades Credit Suisse Group, Moody’s Cuts Some Ratings

  CVS, Walmart, Walgreens Reach $12 Billion Opioid Settlement

  Elon Musk Reveals Price of ‘Twitter Blue’ After Viral Stephen King Tweet, Slams ‘Lords and Peasants’ System

  Netflix With Ads Launching as Talks Continue With Studios Over Content

  Meta Investors Learn a Hard Lesson About Super-Voting Shares

  With Pay Ranges of $2 Million, NYC Transparency Law Is Off to a Glitchy Start

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• CWS Market Review – November 1, 2022
  Eddy Elfenbein, November 1st, 2022 at 6:48 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 Best Month for the Dow in 46 Years

  The Dow Jones Industrial Average just wrapped up its best month since January 1976. For October, the index gained 14.1% while the S&P 500 was up “only” 8.1%.

  It’s true that the Dow isn’t a very good index as stock indexes go. It’s simply 30 stock prices added up and adjusted by a divisor. The Dow doesn’t care how big or small the companies are. They’re weighted solely by price which seems pretty silly. Of course, the major advantage the Dow has is that it’s very old.

  

  Still, it’s an achievement to claim the best of anything since 1976. It also underscores something I’ve been talking about recently which is that I’m more impressed by this latest rally than by the previous head fakes.

  Indeed, this rally may also prove to be phony, but there are reasons to suspend judgment. The difference is that there may be actual improvements in the outlook for inflation, and by extension, the Federal Reserve’s campaign to increase interest rates.

  I’ll give you an example. Last week, I said that the Q3 GDP report might come in better than expected. I was right. For the third quarter, the U.S. economy grew at an annualized rate of 2.6% (after inflation). That’s not great, but it’s better than a recession. Expectations were for growth of 2.3%.

  Along with the GDP report, the government also reported the personal consumption expenditure price index. This is the Fed’s preferred measure of inflation. The latest figures show that headline inflation measured 6.2% in the 12 months ending in September. That’s high, but it was 7% in June. The 12-month core rate is 5.1%.

  These numbers may indicate that inflation has peaked. I don’t want to be premature, and we need more data before making a firm judgment, but the trend is promising. Compare us to Europe where inflation is running at more than 10%.

  All of this is weighing on Jerome Powell and his buddies inside the Federal Reserve. In fact, The Fed started its two-day meeting today. Tomorrow afternoon, we’ll get the latest policy statement. Spoiler alert: The Fed will increase interest rates by another 0.75%.

  This will be the fourth meeting in a row where the Fed has hiked by 0.75%. This coming rate hike will bring the Fed’s target for short-term interest rates to a range of 3.75% to 4.00%. That means that rates are getting closer to inflation. Soon real rates will actually be positive. That’s something we haven’t seen in a few years.

  Here’s the Fed funds rate (black) along with core inflation (red).

  

  With this meeting, I’ll be curious to see if the Fed offers any indication of where it sees interest rates going. After this meeting, the Fed’s outlook will be a lot less clear. The futures market is currently evenly divided on what the Fed will do at its December meeting. Futures traders place about a 50% chance on a 0.50% rate increase and a 50% chance on a 0.75% rate increase. For now, I’d lean towards another 0.75% increase.

  These rate hikes are what have hurt the stock market this year. The higher rates have also crushed so many of the former stock market stars. Have you seen Meta Platforms (META) recently? The Zuck has torched an astounding amount of shareholder value. From peak to trough, META has dropped from $384 to $93. That’s a drop of nearly $900 billion.

  What’s happened is that higher rates have forced investors to be more conservative. That’s been very good news for our Buy List. Even though it’s been a difficult market, our Buy List has consistently outperformed the S&P 500 since the spring.

  At some point, the rate hikes will have to end. That’s good for stocks. It will be clear that the rate hikes are hurting the economy more than inflation. We’re already seeing that in the housing market and with the strong dollar. In Australia, the central bank there recently increased rates by only 0.25%, down from their earlier increases of 0.5%.

  The details of the GDP report clearly show what’s happening. Consumer spending is up, but not by a lot. Trade has been quite good, but due to the strong U.S. dollar, that probably won’t last. The most noticeable part of the GDP report is that the housing market is a big drag on the U.S. economy. Housing all by itself knocked 1.4% off of Q3 GDP growth.

  I can’t say I’m surprised. Home sales recently posted their longest streak of declines in 15 years. Consumers are getting squeezed by higher prices and slow wage growth. During Q3, Americans saved 3.3% of their after-tax income in the third quarter. That’s the lowest rate in 15 years.

  There’s clear evidence of weakness ahead for the economy. Interestingly, Jerome Powell is not a big fan of the 2/10 Spread. Instead, the chairman likes to follow the difference between the three-month Treasury and its implied yield in 18 months. That’s close to inverting. The spread dropped as low as 0.2% recently.

  Today we learned that the ISM Manufacturing Index fell to 50.2 last month. That’s barely in the positive range. It means that the manufacturing sector of the economy is still expanding, just very slowly. That’s down from 50.9 in September.

  At Bloomberg, they have a model which gauges the odds of a recession starting in the next 12 months. The latest numbers show the odds at 100%. Well, that seems pretty certain. They also polled some economists and they put the odds of a recession at 60%.

  The next big test for the market will come this Friday. That’s when the government will release the jobs report for October. In September, the jobless rate was just 3.5% which is low by historical standards. The consensus on Wall Street is to see an increase of 205,000 nonfarm payrolls. However, one weak point is that wages aren’t rising as fast as inflation. The real question is how much the tight labor market is to blame for inflation or, rather, if inflation is due more to supply-chain issues and the war in Ukraine. We’ll find out soon.

  Stock Focus: Celanese

  This week, I want to look at Celanese (CE), which is one of the more interesting companies around. The company is the world’s leading maker of acetic acid. That’s one of those things that few people even think about, but it’s used in dozens of applications.

  Each year, Celanese makes about two million tons of the stuff. That’s about 25% of the world’s supply. The company is based in Irving, Texas and they have manufacturing facilities all around the world. Celanese is also the world’s leading maker of vinyl acetate. That’s a key ingredient in furniture glue. They also make 25% of the world’s supply.

  The important fact is that Celanese dominates the market in important things. This is what you think of when Warren Buffett talks about companies that have a strong “moat.” That means that it’s not so easy for a competitor to come along and knock them off their perch.

  That’s why I wasn’t surprised when Warren Buffett said that he added Celanese to his portfolio earlier this year. The stock jumped more than 7% on the news. Celanese really is a classic Berkshire kind of stock. The company generates tons of free cash flow.

  The big news for Celanese this year is that it agreed to buy the Mobility and Materials division from DuPont for $11 billion in cash. The deal was announced in February, and it was completed today.

  The unit had sales last year of $3.5 billion. From the press release, “As part of the transaction, Celanese has acquired a broad portfolio of engineered thermoplastics and elastomers, industry-renowned brands and intellectual property, global production assets, and a world-class organization.”

  

  Celanese has been around for over 100 years. In the 1980s, they spun off their pharmaceutical business, and that’s Celgene. In 1987, Celanese merged with Hoechst to become Hoechst Celanese. That lasted for a few years until Hoechst spun off Celanese. After that, Blackstone bought out Celanese and then quickly IPO’d it in 2005.

  There are two important facts to mention about Celanese. The first is that the stock has been a terrible performer lately. In June, the shares were over $160. Lately, it’s been as low at $87. The stock is lower than where it was four years ago.

  When I see that a good stock has been behaving badly lately, that scares most people off. It’s natural to judge a stock on its recent performance. Still, I like to find good stocks that have gotten beaten up. The difference is that high-quality companies often bounce back.

  I also like the steady dividend. Celanese’s quarterly dividend has gradually increased from four cents per share in 2010 to 70 cents per share this year. At Celanese’s current price, the dividend yields close to 3%.

  The other important fact is that Celanese’s profit tends to be very volatile. That’s not necessarily a bad thing. It’s simply the nature of some businesses. Last year, Celanese earned $18.12 per share. That gives the company a trailing Price/Earnings Ratio of about five. Wall Street sees CE’s earnings falling to $17.59 per share this year, and $14.28 per share next year.

  It can be a challenge to value a company with such wildly changing numbers. With a consumer staple, it’s pretty easy, but a chemical entity can be frustrating. A better way to look at its earnings is by comparing longer cycles to each other instead of each year.

  For Q2, Celanese earned $4.99 per share. Sales were up 13% over last year’s Q2. The company has been able to navigate well with price increases. Having pricing power is also a key ingredient of a business with a wide moat. For the quarter, Celanese had operating cash flow of $495 million and free cash flow of $368 million.

  Celanese will report its Q3 earnings on Friday. The company said it expects earnings at the low end of its range of $4.00 to $4.50 per share. Wall Street expects $3.98 per share. CEO Lori Ryerkerk said, “we expect to deliver 2022 adjusted earnings per share approximately in line with our 2021 adjusted earnings per share performance.”

  Celanese’s stock is down, but that may not last long.

  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: November 1, 2022
  Eddy Elfenbein, November 1st, 2022 at 7:09 am

  Brazil Truckers Block Roads as Bolsonaro Maintains Silence

  2-Minute Showers and a Flotilla of Gas Shipments: Europe Braces for Winter

  Saudi Aramco Reports $42 Billion in Profit as Cash Rolls In

  Biden Accuses Oil Companies of ‘War Profiteering’ and Threatens Windfall Tax

  U.S. Sets Timeline for Oil Price Cap Enforcement

  Higher Interest Rates Fuel Losses at the Federal Reserve

  Bonds Rally With Powell’s Favored Curve Poised for Inversion

  Credit Suisse Is Not For Sale, Chairman Says

  Food Prices Soar, and So Do Companies’ Profits

  The Fed’s Problem With the Job Market

  F.T.C. Accuses Ed Tech Firm Chegg of ‘Careless’ Data Security

  New Biden Rule Speeds Up Student-Loan Forgiveness for Defrauded Borrowers

  Foreign Students Say Canada Is Exploiting Them for ‘Cheap Labor’

  Elon Musk Is Forming Circle of Advisers as He Reimagines Twitter

  Delta Air Pilots Vote to Authorize Strike

  Penguin Random House Blocked From Acquiring Rival Publisher Simon & Schuster

  What Does the End of Yeezy Mean for the Sneakerverse?

  Victoria’s Secret to Buy Lingerie Brand Adore Me for $400 Million

  Entrepreneur Tinkov Renounces Russian Citizenship Over Ukraine War

  The Highest-Paid Dead Celebrities Of 2022—A Writer Earns Half-A-Billion From The Great Beyond

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