Archive for March, 2023

• Morning News: March 8, 2023
  Eddy Elfenbein, March 8th, 2023 at 4:49 am

  China’s Financial Regulatory Revamp Raises Hope, Some Concern Over Control

  London Bankers Hope for Brexit Thaw After Northern Ireland Deal

  Fed Chair Opens Door to Faster Rate Moves and a Higher Peak

  Oil Extends Declines on Rate Hike Concerns

  Global Investors Contemplate Fallout From US Rates Reaching 6%

  Deepest Bond Yield Inversion Since Volcker Suggests Hard Landing

  Citadel’s Griffin Sees Setup for US Recession After ‘Traumatic’ Inflation

  Biden’s Plan to Avert Medicare Funding Crisis Includes Tax Hikes

  SoFi Bank Sues to Block Biden’s Student Loan Payment Pause

  Justice Dept. Sues to Block JetBlue’s Acquisition of Spirit

  F.T.C. Intensifies Investigation of Twitter’s Privacy Practices

  How Google Became Cautious of AI and Gave Microsoft an Opening

  Credit Suisse Obtains Key Approval to Launch Wealth Business in China

  Bank of America CEO Says ‘We Are Capitalists’ as Anti-ESG Critics Gain Steam

  Walgreens Faces Blowback for Not Offering Abortion Pill in 21 States

  Hershey Unveils Plant-Based Reese’s Cups, Chocolate Bars — That Cost More

  Sold-Out Girl Scout Cookie Flavor Hits the Resale Market

  It Turns Out Money Does Buy Happiness, At Least Up to $500,000

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• CWS Market Review – March 7, 2023
  Eddy Elfenbein, March 7th, 2023 at 6:51 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.”)

  There’s a classic bit from the original Saturday Night Live cast where they parody the Carter-Ford presidential debates from 1976.

  During the skit, Jane Curtin, as one of the panelists, asks a very wonkish question alluding to several facts and figures. Chevy Chase, as President Ford (who doesn’t bother trying to look like the president), appears completely bewildered and famously responds, “it was my understanding that there would be no math.”

  

  I mention this because the question Jane Curtin asks has to do with the Humphrey-Hawkins Act, which at the time was only a bill.

  Today, it’s a law and its official name is the Full Employment and Balanced Growth Act of 1978. The act is more informally known for its two major sponsors, Congressman Augustus Hawkins and Senator Hubert Humphrey. The act was signed into law a few months after Humphrey died.

  The act has an interesting history because it started out as a classic Keynesian bill that aimed for full employment. Instead, the final bill was stripped of those provisions, and it was given a Friedmanite flair. For example, the act requires the Fed to outline its targets for monetary aggregates.

  Another mandate of Humphrey-Hawkins is that the Chairman of the Federal Reserve must testify before Congress twice a year on monetary policy. Each testimony lasts two days, one day each before the House Financial Services Committee and the Senate Banking Committee.

  Several years ago, I went to the Senate hearing to see the festivities live. I was surprised to find that except for the senators and a few cameramen, the room was nearly empty. I even got the seat directly behind Chairman Bernanke.

  Today, Jerome Powell gave his Humphrey-Hawkins testimony before the Senate Banking Committee. In his remarks, Powell said that interest rates will likely go higher than the central bank had expected. The big change is that inflation appears to have reversed its direction and it may be accelerating again.

  “The latest economic data have come in stronger than expected, which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated,” Powell said in remarks prepared for two appearances this week on Capitol Hill. “If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes.”

  Home prices appear to be one of the few areas where prices are going down. This news is especially difficult for the Fed because it had recently downshifted to 0.25% rate hikes. That was seen as a sign that the Fed was winning the battle against inflation. Now that’s in doubt.

  In December, the Fed updated its economic projections. At the time, the Fed saw interest rates peaking at 5.1%. In fact, Wall Street thought the Fed was being unduly alarmist. Not anymore. Now traders think the Fed was too optimistic.

  Interestingly, Powell didn’t specify how high he thinks rates could go but his remarks had an immediate impact on the market. The two-year Treasury yield broke above 5% for the first time since 2007. Yesterday’s traders thought the odds of a 0.5% hike at the Fed’s next meeting (in two weeks) was 31%. Now it’s up to 70%.

  After that, traders expect two more 0.25% increases, one in May and another in June. Traders then expect the Fed to hold tight through the end of the year. There are even some bets that the Fed will start cutting early next year.

  I should caution that the futures market is merely a mass of traders placing bets on the future. There are no guarantees, but it’s interesting to note that the perceived ceiling for interest rates keeps rising.

  I often talk about the 2/10 Spread because it has a good historical track record in predicting recessions. Today, the 2/10 Spread dropped below -100 basis points. The two-year Treasury now yields more than 1% over the 10-year Treasury. This hasn’t happened in 42 years.

  The stock market did not take the Powell news well. At its low, the Dow lost 593 points. The S&P 500 lost over 1.5% today and the index closed below 4,000. The banks got hit especially hard today. The S&P 500 Financial Index lost 2.54% today.

  

  I need to stress how dangerous inflation is for investors. The recrudescence of inflation is the most important obstacle Wall Street currently faces. A depreciating currency may appear beneficial in the short-term, as anyone who remembers the 1970s can attest, but it’s eventually very destructive. In 1977, Warren Buffett wrote an essay on this subject called, “How Inflation Swindles the Equity Investor.”

  For businesses, inflation has an unusual impact on the bottom line. Bear in mind that not all earnings are the same. Inflation exacts a heavy toll on asset-heavy businesses. Inflation has an impact similar to putting a magnet near a compass. Everything gets a little screwy. For example, companies with high assets relative to their profits tend to report ersatz earnings.

  At first, inflation gives the illusion of prosperity. Businesses create their products in fewer and more expensive dollars and then sell them for cheaper dollars and more numerous dollars. As an accounting item, the business may appear more profitable, but no wealth has been created.

  Inflation also favors the debtor in favor of the creditor. Again, any benefit is short-lived. In fact, once lenders see the impact of inflation, the ultimate outcome is to price the marginal borrower out of the credit markets.

  Stocks have historically not performed well during periods of high inflation. Inflation is, at root, a tax on capital. In the late 1970s, the stock market’s P/E Ratio dropped well below 10. I don’t even want to think we could return to those kinds of valuations. It’s no accident that Walmart was such a big winner during the 70s since it was so focused on giving shoppers lower prices.

  

  Professor Robert Shiller, a Nobel prize winner, maintains an online database of historical market data. It goes back 150 years. A few years ago, I went through the numbers to see how the stock market has responded to differing levels of inflation.

  The stock market has performed well up until inflation gets to about 7%. Anything above that, and the stock market gets ugly. The math isn’t hard. Equity prices are squeezed on two ends. Inflation causes interest rates to rise and that makes for higher borrowing costs. Also, equity valuations are discounted at a higher rate, which translates to lower earnings multiples.

  Things may get more dramatic soon. The February jobs report is due out this Friday. Wall Street’s consensus is that the U.S. economy added 250,000 net new jobs last month. After that, the February CPI report comes out next Tuesday.

  Stock Focus: Donaldson

  This week, I want to feature Donaldson (DCI). This was a former Buy List stock that I stupidly let get away. Since 1990, shares of DCI are up more than 10,800%.

  Donaldson is in the filtration biz which is one of those areas that few people ever think about, but it’s a lot bigger than you might imagine. The company was founded by Frank Donaldson in 1915 and it’s based in Minneapolis, MN.

  Donaldson currently has a market value of about $8 billion. It’s a member of the S&P 400 Mid-Cap Index. A few Wall Street analysts follow it, but not many. In the last 35 years, Donaldson has split its stock 2-for-1 five times and once 3-for-2. That works out to 48-for-1.

  

  Last week, Donaldson reported fiscal Q2 earnings of 75 cents per share. That was two cents more than estimates. Donaldson also narrowed its full-year guidance to a range of $2.99 to $3.07 per share. That’s an increase of eight cents to its low end. The company has already made $1.50 per share for its first two quarters. Donaldson expects sales to rise by 2% to 6% this year.

  Donaldson currently pays out a dividend of 23 cents per share. The company has increased its dividend for 27 consecutive years. In 1987, DCI paid out a dividend of about one-third of a penny per share.

  Wall Street expects DCI to earn $3.17 per share next year. That means the stock is going for just under 21 times next year’s earnings. That’s not bad.

  Donaldson reminds me of Peter Lynch’s advice to find companies that are boring. They sound boring. The product is boring and industry is boring. I’d rather not have to wince each time the CEO decides to tweet something.

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

  – Eddy

• Morning News: March 7, 2023
  Eddy Elfenbein, March 7th, 2023 at 7:06 am

  Iran’s Rulers, Shaken by Protests, Now Face Currency Crisis

  China Jan-Feb Trade Slumps Again as Global Demand Falters

  European Bonds Get a Respite From Softer Inflation Expectations

  Roubini Fears Hard Landing Amid Persistent Global Inflation

  Why the Federal Reserve Won’t Commit

  Why the Recession Is Always Six Months Away

  Biden Proposes Tax Hike on Income Over $400,000 to Fund Medicare

  The Debt Ceiling Is the Risk Wall Street Doesn’t Want to Think About

  Debt Default Would Cripple U.S. Economy, New Analysis Warns

  US Payrolls Have Beat Forecasts 10 Straight Months. What’s Next?

  How Seasonality Affects Our View of Inflation and Jobs, as Explained With Hot Dogs

  Grayscale-SEC Fight Could Clear the Way for Anybody to Speculate on Bitcoin

  A Bank President Who Embraces the Unconventional

  JPMorgan Is Growing in Florida and Texas, States That ‘Like Business,’ Dimon Says

  U.S. to Challenge Mexican Ban on Genetically Modified Corn

  A Mega Airline Merger Hits Turbulence

  How Lego Beat Barbie and Monopoly

  Adidas Could ‘Literally Burn’ $500 Million in Unsold ‘Yeezy’ Apparel

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• Morning News: March 6, 2023
  Eddy Elfenbein, March 6th, 2023 at 7:04 am

  Missing Banker Reignites Fear of Xi Among China’s Tech Bosses

  World’s Riskiest Markets Stumble Into Crisis With Dollars Scarce

  Chinese Companies Hang Onto Dollars, Hedge to Prepare for Volatile Yuan

  Japan Piled Back Into U.S. Treasurys This Year. Investors Worry It Won’t Last

  Republican Votes Helped Washington Pile Up Debt

  Powell Set to Lay Groundwork for Higher Rates on Capitol Hill

  Fed’s Rate Moves Put Manufacturing Sector at Risk

  The Paul Volcker Narrative Imagines an Economy That Doesn’t Exist, and That Never Has

  Holding Cash Will Be a Winning Strategy in 2023, Investors Say

  Billion-Dollar Power Lines Finally Inching Ahead to Help US Grids

  The Trillion-Dollar Debate Over Share Buybacks

  Credit Suisse Loses One of Its Biggest Backers

  EVs Boost Chip Demand Despite Semiconductor Makers’ Woes

  Here’s How Much $1,000 Invested In Tesla Will Be Worth If Cathie Wood’s 2026 Price Target Comes True

  Housing Market Momentum Stalls as Critical Spring Season Approaches

  Bars, Hotels and Restaurants Become the Economy’s Fastest-Growing Employers

  You’re Now a ‘Manager.’ Forget About Overtime Pay.

  What Is a CEO’s Pay Actually Worth?

  How Chili’s Is Prepping for Tough Times, Starting With the Fries

  Toblerone Chocolate Is No Longer ‘Swiss’ Enough for Alps Logo

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• Morning News: March 3, 2023
  Eddy Elfenbein, March 3rd, 2023 at 7:02 am

  How Gas From Texas Becomes Cooking Fuel in France

  Nigeria’s Supreme Court Orders Halt to Cash Replacement Policy

  Rules to Curb Illicit Dollar Flows Create Hardships for Iraqis

  What Wall Street Gets Wrong About Xi Jinping’s New Money Men

  Academic Fight Erupts Over Measuring the West’s Pressure on Russian Economy

  The World Economy Is Doing Well—This Is Bad News for Central Bankers

  Fed Official Says Hotter Data Will Warrant Higher Rates

  Clueless Wall Street Is Racing to Size Up Zero-Day Options Boom

  Investors Shore Up Stablecoins as Silvergate Exodus Worsens

  iPhone Maker Plans $700 Million India Plant in Shift From China

  Office Mandates. Pickleball. Beer. What Will Make Hybrid Work Stick?

  Zoom Abruptly Fires President Greg Tomb ‘Without Cause’

  Key American Allies Aren’t Following Governmentwide TikTok Bans

  Why Barnes & Noble Is Copying Local Bookstores It Once Threatened

  Nordstrom to Close All Its Canadian Stores, Lay Off 2,500 Workers

  Adani Shares Surge After $1.87 Billion GQG Investment; More Road Shows Lined Up

  Ericsson to Pay About $207 Million After DOJ Finds It Breached Deal

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• Morning News: March 2, 2023
  Eddy Elfenbein, March 2nd, 2023 at 7:08 am

  Leave Russia? A Year Later Many Companies Can’t, or Won’t

  Carbon Emissions Climbed Less Than Feared in 2022 Despite Coal Resurgence

  Idled Ships, Empty Containers. Ocean Shipping Faces Its Biggest Slump in Years

  Eurozone Inflation Edges Lower, but Pressure on Prices Continues

  How One of the Fugees Got Sucked Into US-China Intrigue

  Credit Suisse Offers Higher Deposit Rates in Asia to Woo the Wealthy

  Today’s QE Saddles Governments With Soaring Debt Costs

  Fed Might Be Winning Inflation Fight, Depending on Index Use

  Uncle Sam Is Disrupting the Venture Capital World

  Silvergate’s Big Crypto Losses Feed Watchdogs’ Worst Fears

  Goldman Sachs Faces Hard Sell for Its Consumer Assets

  Tesla Investor Day Disappoints With Sparse Detail on New Models

  Salesforce Stock Surges as Software Maker Sees Its Profitability Rising

  Eli Lilly to Slash Prices for Insulin Drugs by 70%

  Delta Pilots Approve Contract Raising Pay by 34%

  Macy’s Earnings Smash Expectations. The Stock Flies — Thank the Outlook

  I Spent Two Years Revenge Spending. It Was Hard to Stop

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• Morning News: March 1, 2023
  Eddy Elfenbein, March 1st, 2023 at 7:08 am

  Kremlin Critics Seek Sanctions Relief for Anti-War Tycoons

  China Leaders Surprised by Pace of Economy’s Rebound

  Fewer American Companies See China as a Top Investment Priority

  Where Digital Payments, Even for a 10-Cent Chai, Are Colossal in Scale

  Finance Is Failing the World’s Best Defense Against Climate Change

  World’s Rich Snap Up Commercial Property Like Never Before

  U.S. Mortgage Interest Rates Remain at Highest Level Since November

  Car Debt Is Piling Up as More Americans Owe Thousands More Than Vehicles Are Worth

  Long-Robust U.S. Labor Market Shows Signs of Cooling

  Fed’s Soft Landing Hinges on a Wage Inflation ‘Head Scratcher’

  Biden Is Betting on Government Aid to Change Corporate Behavior

  ‘Sometimes Things Break’: Twitter Outages Are on the Rise

  Elon Musk Aims to Rally Tesla Shareholders Around Long-Term Vision at Investor Day

  As Dollar Stores Proliferate, Some Communities Say No

  Rivian Posts Mixed Quarterly Results, Issues New Recall

  Lowe’s Stock Slips as Q4 Sales Lag Expectations

  McDonald’s Cardi B and Offset Promotion Draws Pushback From Some Restaurant Owners

  The 15-Minute City: Where Urban Planning Meets Conspiracy Theories

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