Archive for March, 2024

• Morning News: March 29, 2024
  Eddy Elfenbein, March 29th, 2024 at 7:03 am

  Greece to Increase Minimum Wage by €50 a Month from April 1

  Japan FX Chief Calls Yen’s Slump Unusual, Vows to Act if Needed

  Korean Banks Say to Compensate Investors for China-Linked Notes

  Stock Market Surges to Start the Year: 22 Record Highs in 3 Months

  Bankman-Fried Is Sentenced to 25 Years in Prison Over FTX Collapse

  Sam Bankman-Fried’s Sentence Is a Warning to Crypto

  Robinhood’s Credit Card Offers 3% Cash Back. Can It Last?

  Those Billion-Dollar Lottery ‘Jackpots’ Aren’t Even Half That Big

  Giant Merger Deals Stage a Comeback

  Huawei Stages Comeback With Annual Net Profit More Than Doubling

  Apple Plans New iPad Pro for May as Production Ramps Up Overseas

  How the Israel-Hamas War Has Roiled TikTok Internally

  San Francisco’s ‘Twitter Menace’ or True Believer? He Might Be Both

  Syngenta Pulls China IPO Application After Three-Year Wait

  Viavi Says Its Spirent Bid Has Certain Value Amid Bidding War

  US Approves $60 Million in Urgent Funds for Baltimore Bridge

  Auto Industry Expects Minimal Disruption From Port Shutdown

  Plans for World’s Fastest Train Service Delayed as Japan Ditches 2027 Target

  Xiaomi Prices First EV Competitively, Seeks Pole Position in Crowded Market

  Tesla’s Terrible Quarter Catches Some Analysts Asleep at the Wheel

  Tesla Dives Into Advertising After Years of Resistance

  Renault to Build Electric Vans at Plant in Northern France

  Young Indians More Likely to Be Jobless If They’re Educated

  Harvard Applications Drop 5% After Tumultuous Year on Campus

  Building Diversity When Affirmative Action Is Banned

  Can Reed Hastings Disrupt Skiing?

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• Morning News: March 28, 2024
  Eddy Elfenbein, March 28th, 2024 at 7:06 am

  China Property Crisis Is Rippling Through Its Biggest Banks

  Russia Sends Cuba First Oil in a Year to Ease Blackouts and Unrest

  Dalio Says China Must Fix Debt Problems or Face ‘Lost Decade’

  As Relations Thaw, China Lifts Tariffs on Australian Wine

  BOJ Summary Hints at Cautious Approach to Further Rate Increases

  UK Confirmed in Recession at End of 2023

  Fed Hawks Put the Dollar on Track for Best Quarter Since 2022

  Fed’s Waller Says No Rush to Cut Interest Rates

  Biden Is Breaking Campaign Rule No. 1. And It Just Might Work

  Ad Forecaster Raises 2024 Prediction Amid Improving Economic Outlook

  UBS Makes Ermotti Europe’s Best-Paid Bank Boss with $16 Million Package

  UBS Banker’s Frustration Exposes Cracks in World of Climate Finance

  SBF Prison Time Hangs on Persuading Judge He Is No Bernie Madoff

  Harvey Schwartz Spends First Year at Carlyle Tending Old Wounds

  The Dali Is a Big Ship. But Not the Biggest

  Baltimore Bridge May Trigger Historic Marine Loss, Says Lloyd’s of London

  4 Takeaways About Boeing’s Quality Problems

  ‘Shortcuts Everywhere’: How Boeing Favored Speed Over Quality

  EVs Are Splitting the Auto World Into Two: Made in China, or Not

  Tesla’s $25,000 Car Means Tossing Out the 100-Year-Old Assembly Line

  Mercedes Is Liable for Emissions Cheating Device, Court Rules

  Can a Legally Binding Treaty Fix the World’s Plastic Problem?

  Alibaba’s Plan to Split Is Being Replaced by Greater Focus on Its Core

  Home Depot Buys Roofing Distributor in Deal Valued at $18 Billion Including Debt

  The Cautionary Tale of Wirecutter and the Internet’s Favorite Wok

  ‘Winners and Losers’ as $20 Fast-Food Wage Nears in California

  Walgreens Suffers $6 Billion Loss As VillageMD Clinic Investment Sours

  Big Tobacco Is Now Under the Zynfluence

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• Morning News: March 27, 2024
  Eddy Elfenbein, March 27th, 2024 at 6:57 am

  American Business Stalls in China

  Xi Says US CEOs Should Invest in China, Economy Hasn’t Peaked

  Japan Steps Closer to Intervention as Yen Hits Lowest Since 1990

  The Real Bridge Too Far Is Financing

  Rising Minimum Wage Risks Stoking Inflation, Says CBI Chief

  In a Passive World, These Stockpickers Are Thriving

  Nvidia Catapults EM Stock Picker to Top Ranking and Irks Rivals

  UBS Sells $8 Billion of Credit Suisse Assets to Apollo

  Visa and Mastercard Agree to Cap Their Swipe Fees in Settlement

  In US Antitrust War, Bet on Brandeis Not Bork

  Using Your Premium Credit Card May Cost More After Visa-Mastercard Deal

  Robinhood Ventures Further Beyond Trading with New Credit Card

  Why BlackRock’s C.E.O. Wants to Rethink Retirement

  Gates-Backed Startup Hits Milestone, Races Ahead on Green Steel

  The U.S. Investors Caught in the Scrum Over TikTok

  The U.S.’s Forced Sale of TikTok Is the Stuff of Third World Nations

  Tesla’s Hunt for Self-Driving Revenue

  A Pivot to China Saved Elon Musk. It Also Binds Him to Beijing

  Chinese Train Maker CRRC Drops Bid for $665 Million Bulgarian Contract

  Gamestop Set to Fall Most in Nine Months After Revenue Plunges

  Nestle to Spend $132 Million to Improve Supplier Sustainability in East and Southern Africa

  How Michael Rubin Ended Up Holding All the Cards

  H&M Outlook on Track as Sales Pick Up

  NBC Drops Former RNC Chief Ronna McDaniel Amid Backlash

  Trump’s Media Company Ticker Leads to Fleeting Windfall

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• CWS Market Review – March 26, 2024
  Eddy Elfenbein, March 26th, 2024 at 6:34 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 Equity Risk Premium Goes to Zero

  The stock market did something recently it hasn’t done in over 20 years. The yield on the 10-year Treasury exceeded the earnings yield for the S&P 500.

  What am I talking about? Let’s dive in.

  By earnings yield, I mean the S&P 500’s earnings divided by its price. That’s the inverse of the market’s price/earnings ratio.

  To be more technical, the equity risk premium has gone to zero. Typically, one would expect a benefit from owning stocks. According to the theory, this is the reward shareholders get for shouldering more risk. Sometime the benefit is a lot, sometimes it’s a little. Right now, it doesn’t exist.

  Here’s a look at the yield on the 10-year Treasury (in black) along with the S&P 500’s earnings yield (in purple).

  

  Here’s how it works, or at least how it’s supposed to work (my apologies for getting mathy).

  Take the 10-year Treasury yield. Right now, that’s around 4.25%. Add 2% to that for the risk premium (so 6.25%). Then take the inverse of that (1/0.0625 = 16) and that should roughly be the stock market’s price/earnings ratio. In this case, that’s 16.

  Except, right now, it’s not even close. The stock market’s current price/earnings ratio is currently at 24. That’s roughly 50% higher than where the model thinks it should be.

  As of Friday, the 10-year Treasury yield was 4.27% while the earnings yield of the S&P 500 was 4.10%. That means that investors are being punished by 17 basis points for owning stocks. This is also why we pay so much attention to what the Fed has to say about interest rates.

  Let me add some very cautious words about this kind of analysis. I’m not a fan of trying to model the stock market. Many have tried but the market gods have left many a ruined spreadsheet in their wake. To quote Isaac Newton, “I can calculate the motion of heavenly bodies, but not the madness of people.”

  The model isn’t saying that stocks are overpriced. Rather, it’s saying that stocks are richly valued relative to bonds compared with previous periods. That’s quite a different takeaway.

  Here’s a look at the Equity Risk Premium which is how much stock investors are being paid to buy stocks instead of bonds.

  

  Still, even bad models can make a point. This one is telling us a very basic fact that we can’t ignore. That is that stock prices have gone up a lot over the past five months. Meanwhile, bond prices have been creeping lower.

  At some point, bonds are a better deal than stocks. I don’t know where that line is, but I do know two things: it’s out there somewhere, and we’re much closer to it than we’ve been in quite some time.

  This isn’t to scare you. I have no plans to sell all my stocks, but it’s responsible to ensure that investors are aware of the current climate.

  Interestingly, stocks reached their most recent low point in late October right as the 10-year Treasury peaked near 5%. (It came very close to breaking above 5% but couldn’t quite do it.)

  Since then, stocks have rallied, and the 10-year Treasury yield fell, but that came to an end just before New Year’s. We went from Stocks-Up, Bonds-Up to Stocks-Up, Bonds-Down. The first one can last a long time, but the second one is a lot less stable. Last week, the 10-year yield got above 4.3%.

  

  While I don’t plan on selling anything, I certainly can understand the mindset of some investors who look at the current prices and realize that they can sit out the volatility of the stock market and lock-in, say, a one-year Treasury for 5%. That’s the equivalent of 2,000 Dow points. For zero risk!

  It’s not for me, but I get why some people are happy to take it. This shows us how distorting higher interest rates can be. This also tells me that sometime soon, the Fed will cut rates not because it wants to, but because it has too.

  The odds of a rate cut in June are at 70%, and that rises to 84% for a cut by July. The odds for two cuts by July are low (now around 30%). It may soon be that we’ll get one cut, in June or July, but which month isn’t yet clear.

  The Reddit Rally

  Last week, I told you about the weakness in many defensive sectors. That’s exactly the outcome of diverging stock and bond markets. Last week, I mentioned how one of our favorite defensive stocks, Hershey (HSY), has been acting poorly of late. This is exactly the kind of stock that leads the market when the economy gets soft.

  I mentioned that the chocolate giant has been squeezed by higher cocoa prices. Due to heavy rains in west Africa, there’s been a massive shortage of cocoa. That’s where 70% of the world’s cocoa comes from. So far, Hershey has been able to pass along some of these price increases.

  Cocoa is outperforming Nvidia this year. Earlier today, BNP Paribas Exane downgraded Hershey from outperform to neutral.

  

  The cocoa rally, however, has gone into overdrive, and Easter is one of the biggest times of the year for chocolate consumption. For the first time ever, cocoa is trading north of $10,000 per metric ton. Hershey says it predicts flat earnings this year. At some point soon, I expect cocoa prices to plunge back to earth.

  But this is a different outcome from the same driver. Investors are ignoring risk. Cocoa isn’t the only place we’re seeing surging prices. Last week, Reddit (RDDT) went public, and the stock has performed very well.

  I wanted to show you just how extreme some of the valuations are. Let’s take a closer look at Reddit’s business.

  Last year, Reddit had revenue of $804 million and operating income of negative $140 million. In other words, the company is running at an operating loss. Add in $50 million in other income and Reddit lost about $90 million for the year. That works out to minus 57 cents per share.

  Despite running a loss, shares of Reddit were priced at $34. Once trading started, the shares took off. Earlier today, the stock came close to $75 per share. That means the business is trading for more than 130 times its loss from the year.

  I understand that one shouldn’t value nontraditional companies with traditional metrics. Still, at some point, one has to view this as extreme. This is exactly what happens when the equity risk premium goes to zero. When being risky pays off, the market will follow what’s working.

  Reddit is worth $75 per share in the same way cocoa is worth $10,000 per metric ton, or the S&P 500 is worth 24 times earnings. “The voice of reason is small, but very persistent.” — Sigmund Freud.

  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 more info on our ETF, you can check out the ETF’s website.

• Morning News: March 26, 2024
  Eddy Elfenbein, March 26th, 2024 at 6:57 am

  Russia’s Crude Shipments Rebound Even as Sanctions Snare Tankers

  US CEOs Extend China Stay on Last-Minute Invite to Meet Xi

  China’s Battery Champion Says Geopolitical Tensions Won’t Derail U.S. Expansion

  German Consumer Confidence Improves Marginally, Defying Fragile Economy

  Savings May Not be Europe’s Super Weapon in Economic Battle

  Closing Australia’s Gender Pay Gap Will Take a Rethink of Senior Roles, Agency Says

  How a New Rule Could Change the Way Advisers Handle Your Retirement Money

  BOE’s Mann Says Markets Pricing Too Many UK Rate Cuts This Year

  Wall Street’s Most Bullish Strategist Cites a ‘Big Surprise’ Pushing Stocks Higher

  The Great Rates Descent Will Be Nasty, Brutish and Long

  Chocoholics Won’t Be the Only Victims of Cocoa’s Surge

  Raging Storms Pushed Disaster Damages Above $100 Billion in 2023

  In France, the Future Is Arriving on a Barge

  Fisker Deal Talks with Big Automaker Collapse, NYSE to Delist Stock

  Elon Musk’s Starlink Terminals Are Falling Into the Wrong Hands

  Amazon’s AI Awakening: Why AMZN Stock Is the Magnificent Seven’s Sleeping Giant

  TikTok Can’t Get Enough Boeing Jokes. Guess Who’s Not Laughing

  Biggest Challenge Facing New Boeing CEO Is Winning Over Airlines

  Adam Neumann and Partners Offer More Than $500 Million for WeWork

  This AI Startup is Trying to Make Fax Machines Work Better for Health Care

  Bertelsmann Posts Higher Profit, Adjusts 2026 Targets

  Flutter Entertainment Pretax Loss Widens Despite Strong Growth in U.S.

  Lofty Valuation Carries Trump’s Social Media Company Into First Trading Day

  McDonald’s to Sell Krispy Kreme Doughnuts Across the US

  Chick-fil-A Modifies Its ‘No Antibiotic’ Chicken Policy

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• Morning News: March 25, 2024
  Eddy Elfenbein, March 25th, 2024 at 6:59 am

  Burned Before, Bond Markets Resume Rate-Cutting Trades Worldwide

  Egypt’s $50 Billion Rescue Betrays Depth of Its Economic Crisis

  Asia Private Equity Deals Set for Worst Q1 Since 2015, Data Shows

  Yuan Rebounds as PBOC Sends Strong Message of Support Via Fixing

  Once High-Flying Bankers in Hong Kong Become a Lost Generation

  Japan’s Currency Chief Warns Against Speculative Moves in Market

  Russian Brokers Launch Frozen Asset Swap Scheme

  Stocks on Inflation Stand-By as Intervention Watch Dogs Yen

  Goldman Sachs Digital Asset Head Says Crypto Rally Driven by Retail Investors

  In a Bumper Year for CEO Pay, a $161 Million Award Swells to $1.3 Billion

  There’s No Such Thing As ‘Easy Money,’ There’s Just Production

  Famously Obstinate, Bill Ackman Is Now Real-Life Famous. What Next?

  US Announces $6 Billion to Clean Up Heavy Manufacturing

  Apple, Google, Meta Probed by EU in Test of New Digital Law

  Reddit to the Moon Won’t Launch an IPO Boom

  Big Tech’s Latest Obsession Is Finding Enough Energy

  Germany’s Solar Panel Industry, Once a Leader, Is Getting Squeezed

  Nissan Motor Plans to Sell More Than a Dozen New EV Models by 2026

  CATL Working With Tesla on Fast-Charging Cells, Supplying Nevada

  PetroChina Profits Surge to Record on Rebound in Gas Demand

  Has China Lost Its Taste for the iPhone?

  Gucci’s China Shock Reverberates Across the Luxury Landscape

  Big Hotel Chains and Unbranded-Hotel Owners Find They Need Each Other

  US Homebuyers Expecting $10,000 Savings Face Tough Reality

  Kingfisher Remains Cautious With Lower Profit, Weak Demand Outlook

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• Morning News: March 22, 2024
  Eddy Elfenbein, March 22nd, 2024 at 4:35 am

  The Tea Shops Bubbling Up Hong Kong’s Anemic IPO Market

  Solar Wafer Prices Plunge Further in China as Producers Struggle

  China Scrutinizes PwC Role in $78 Billion Evergrande Fraud Case

  Foreigners Big Buyers of Japanese Bonds Ahead of BOJ Decision

  The Era of Stagnant Salaries, Steady Prices and Mortgages That Never Go Up Is Over in Japan

  ‘Strike Madness’ Hits Germany While Its Economy Stumbles

  Coming Down the Mountain Needs a Guide. We Don’t Have One

  Western Banks Warn of Risks in EU Plan to Grab Russian Assets

  Santander Expects to Pay Out More Than $6.5 Billion to Shareholders For 2024

  Reddit’s Debut Jump Delivers for New and Old Shareholders Alike

  Apple Loses $113 Billion in Value After Regulators Close In

  Magnificent Seven? It’s More Like the Blazing Two and Tepid Five

  In One Key A.I. Metric, China Pulls Ahead of the U.S.: Talent

  The A.I. Boom Makes Millions for an Unlikely Industry Player: Anguilla

  With TikTok Under Fire, Brands That Rely on It Worry

  What Happened When India Pulled the Plug on TikTok

  One CEO’s Radical Fix for Corporate Troubles: Purge the Bosses

  Lots More on the Big Can Kick in Commercial Real Estate

  National Plan to Look Into Homeowners Insurers Hits a Hurdle

  UK Risks Critical Medicine Shortage as EU Lures Drugmakers

  UK Retail Sales Stronger Than Expected at Start of the Year

  Amazon’s New Focus: Fending Off Rivals Temu and Shein

  They Failed in Their Quests to Buy Birkin Bags. So They Sued

  MLB Games Streamed to Skeptical Korea Fans Show Global Shift

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• Morning News: March 21, 2024
  Eddy Elfenbein, March 21st, 2024 at 7:03 am

  Why the Panama Canal Didn’t Lose Money When Ship Crossings Fell

  Why the Yen Is So Weak and What That Means for Japan

  Biggest Kenyan Bank’s Bid to Fix Bad Debts Hit by State, Courts

  Switzerland Surprises With Rate Cut, Moving Ahead of ECB and Fed

  Julius Baer Hits Reboot to Escape Swiss Banking’s New Malaise

  Swatch CEO Says ‘It’s a Pity’ SNB Didn’t Cut Rates Sooner

  Bank of England Holds Key Rate Steady at 5.25%

  The Fed’s Conundrum: Interest Rates Are Both Too High—and Too Low

  U.S. Debt Races Toward Record This Decade, C.B.O. Warns

  Fidelity’s Abby Johnson Tightens Grip on Far-Flung Family Empire

  Barclays Readies Hundreds of Job Cuts in Investment Bank

  Wall Street’s Biggest Names Share March Madness Tips

  Why Texas Is Banning Banks Over Their ESG Policies

  Wall Street and Silicon Valley Elites Are Warming Up to Trump

  Apple CEO Opens New Shanghai Store in Show of China Commitment

  Seven Things to Know About Reddit’s Unusual IPO

  Is Microsoft Building an Unassailable Lead in A.I.?

  Cash-Rich Cisco Shifts to Net Debt Position for Growth, Returns

  GE Bet on Being the Biggest, Then It Had to Break Up to Keep Up

  Airline CEOs Seek Meeting With Boeing Directors to Address Production Problems

  Biden Approves $5.8 Billion in Additional Student Debt Cancellation

  What Comes Next for the Housing Market?

  Biden Suggests a Bigger Federal Role to Reduce Housing Costs

  Weight-Loss-Drug Users Pay Up for Help Ditching the Pricey Meds

  Target Is Doubling Its Employee Bonuses This Year

  Build-A-Bear’s Shipping Expenses Pushed Up By Red Sea Attacks. Will Stuffed Bears Cost More?

  A Japanese Startup Is Shipping $89 Strawberries, $120 Melons

  The First Name in Ranch Dressing Is Coming for Breakfast

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• Morning News: March 20, 2024
  Eddy Elfenbein, March 20th, 2024 at 7:04 am

  Fitch Upgrades Qatar to Third-Highest Rating on Gas Investments

  How the BOJ’s Plan for a Smooth Exit from Negative Rates Unraveled

  ECB Could Cut Rates in June if Inflation Continues Easing, Lagarde Says

  Indonesia’s Central Bank Stands Pat as Expected, Fed Decision Looms

  Inflation Fears Bloom for the Fed’s Rite of Spring

  Fed to Give Fresh Clues on Path of Interest-Rate Cuts

  US Crypto Firms Paying $300,000 Wages Leave Foreign Peers Behind

  Finma Plans Stress Tests at UBS After Scrutiny on Lender Rises

  BlackRock Ditched by Texas Fund Shows Limits of Fink Persuasion

  Tech Giant Linked to France’s Cybersecurity Tumbles in Value

  Google Fined Roughly $270 Million in France Over Dispute With News Publishers

  Apple Keeps Losing Patent Cases. Its Solution: Rewrite the Rules

  US Weighs Sanctioning Huawei’s Secretive Chinese Chip Network

  Intel Gets $20 Billion in US Grants, Loans for Chip Plants

  The Global Effort to Make an American Microchip

  Hiring Booms at SpaceX and Blue Origin Making It Hard for NASA to Attract Talent

  Boeing Sees Massive Cash Drain as 737 Max Episode Takes Toll

  Nikola’s Rollout of Hydrogen Trucks Is Hitting Supply-Chain Hurdles

  China’s MG Motor Venture Bringing Electric Sports Car to India

  Why Mainland Chinese Flocked to Hong Kong’s New Global Visa

  Lonza to Buy U.S. Manufacturing Facility From Roche For $1.2 Billion

  HP Is Turning Printers Into a Subscription

  To Catch Retail Thieves, This Unlikely Duo Treats Them Like the Mob

  Luxury Stocks Fall After Gucci Owner Kering Warns of Sales Drop

  Shohei Ohtani, the Dodgers’ $700 Million Man, Will Transform Baseball—If He Wants To

  For Women’s Basketball, Caitlin Clark’s Lasting Impact May Be Economic

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• CWS Market Review – March 19, 2024
  Eddy Elfenbein, March 19th, 2024 at 8:57 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.”)

  Why You’re Not Diversified When You Think You Are

  One of the themes I stress to investors, especially newer investors, is the importance of owning a diversified portfolio. So often, I’ll hear investors say, “sure I’m diversified! I own AMD and TSM.” Well, that’s not exactly proper diversification. Owning two stocks that closely mimic each other does little to lower your risk.

  

  Diversification is an important topic and it’s more difficult than it may appear. By not being properly diversified, investors can leave themselves exposed to risks they’re unaware of.

  For example, an investor may load up on several stocks that are highly sensitive to the U.S. dollar. When adding those stocks, they may have had no idea that that was the case. Then, after a few days of trading, they see how their portfolio can be impacted by, say, the decisions of a foreign central bank. They had no idea that’s what they were getting themselves into.

  I’ve also seen many investors become overly exposed to technology stocks. This leaves them open to the twists and turns of the capital investment cycle of some large companies they don’t own.

  I even fell prey to this effect last year when I had both Danaher and Thermo Fisher Scientific on our Buy List. I like both stocks, and it’s no wonder because the companies are similar. Not surprisingly, both stocks tend to behave very similarly, especially in the short term. I should have realized this beforehand.

  An investor can own Lowe’s and Home Depot. There’s certainly no law against it, but understand the position and risks you’re taking. To quote Winston Churchill, “Money is like manure, it’s only good if you spread it around.”

  Oftentimes, you’ll see an investor who had a particularly strong year but on closer inspection, they were merely overly exposed to a particular risk that paid off. Was the investor brilliant or did some category like small-cap growth have a banner year? Humphrey B. Neill said, “Don’t confuse brains with a bull market.”

  Our Buy List is a good example of the portfolio that’s well diversified. You don’t need to own every stock, but a healthy sample can start you on your way to owning a high-quality portfolio that’s properly diversified.

  The Worst Environment for Defensive Stocks in Decades

  I highlight this point because right now, we’re seeing this effect play out. In particular, I’m referring to the lagging performance of many defensive stocks. Sectors like Consumer Staples and Utilities are at their worst relative performance levels in decades.

  Check out this chart below:

  

  The chart shows the S&P 500 Consumer Staples divided by the S&P 500 (in black) and the S&P 500 Utilities divided by the S&P 500 (in red). If those lines are rising, then they’re beating the market, but if they’re falling then they’re lagging the market.

  Right now, the lines are as low as they’ve been in at least 25 years. These lines are important to watch because it reflects how popular defensive stocks are, and right now, they’re very unpopular.

  What’s going on? Defensive stocks, as the name implies, generally move opposite to the overall economy. When the economy gets weak, investors want to own safe and secure defensive stocks. But when the economy is strong, or is perceived to be strong, then investors shy away from defensive stocks in search of cyclical stocks.

  It’s not that one group is in any sense better than another. Rather, time and chance happens to them all. You’ll notice that both lines got a little bump four years ago at the start of Covid. Again, I need to stress that this is relative performance. Both sectors were falling severely, just not as severely as everyone else was.

  Defensive stocks tend to do well when interest rates are falling, which also tends to align with a weak economy. Defensive stocks did indeed trail the market as the Federal Reserve hiked interest rates.

  Lately, there appears to be a disconnect between defensive stocks and the state of the economy. The economy certainly has its strong points, but I’m still surprised by how poorly defensive stocks have been behaving. I always pay attention when good stocks have underperformed for some time. I wouldn’t be surprised to see the cyclical/defensive cycle soon turn.

  On our Buy List, Hershey (HSY) is a good example of a defensive stock that’s been hurting. See the chart below which shows the relative performance of Hershey, meaning HSY divided by the S&P 500.

  

  That’s quite a run-up followed by a rundown. During an economic downturn, folks don’t cut back on their purchases of Hershey Kisses. Over the last ten months, shares of Hershey are down by more than 20% while the S&P 500 is up by more than 20%. Yet, Hershey’s earnings reports have been quite good.

  Certainly, some of the damage has been caused by the soaring price for cocoa. Thanks to heavy rains in west Africa, the price for cocoa has jumped 150% in the past year. In response, Hershey has been able to pass on some of those price increases.

  Right now, Wall Street expects that Hershey will have flat earnings growth this year. That may be right, but I highly doubt that flat earnings growth will last long. At some point, cocoa production will return to normal, and Hershey will prosper.

  I certainly understand the danger in being too defensive, but I think all Street is currently overdoing its aversion to defensive stocks. The cycle will turn.

  Tennant: The Floor Cleaner that Beats the Market

  I enjoy highlighting superior stocks that may not be well-known. This week, I wanted to bring Tennant Company (TNC) to your attention. The company “designs, manufactures, and markets floor cleaning equipment.”

  Tennant has a market cap of just over $2 billion, and only three Wall Street analysts follow the stock.

  A few weeks ago, Tennant reported Q4 earnings of $1.92 per share. That easily beat Wall Street’s consensus (such as it is) of $1.25 per share. In three sessions, the stock gained almost 13%.

  Tennant has an enviable track record. Since 2000, TNC has outpaced the S&P 500 by a margin of 881% to 445%.

  

  Tennant has increased its dividend for the last 52 years in a row. I’ll never understand why stocks like this are so overlooked.

  What to Expect from This Week’s Fed Meeting

  The Federal Reserve is meeting today and tomorrow. The FOMC will release its policy statement tomorrow at 2 pm ET. Don’t expect any change to interest rates. The futures market currently places odds of 99% that the Fed will leave rates unchanged. That sounds about right, maybe a little low.

  Along with tomorrow’s policy statement, the Fed will also update its economic projections. I’ll caution you that the Fed has a very poor track record of trying to forecast what the economy will do. Still, it’s important to see what they’re thinking.

  There won’t be any Fed meeting in April, but the central bank will get together again in early May. Once again, don’t expect much action. Futures traders say there’s a 93% chance that the Fed won’t make any changes to interest rates.

  The earliest traders see the Fed cutting rates is at the June meeting. According to the latest prices, traders place a 60% chance of a rate cut then. That’s still far from certain. We’ll learn more in tomorrow’s Fed statement.

  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 more info on our ETF, you can check out the ETF’s website.