Archive for January, 2025

• Morning News: January 31, 2025
  Eddy Elfenbein, January 31st, 2025 at 7:03 am

  Putin Is Gaining Allies in Europe at a Bad Time for Ukraine

  Tulsi Gabbard Has Five Puppet Masters. Worry Most About the First

  Powell’s Fed on Defensive as Diversity Effort Comes Under Fire

  US Pulls Further Away From China in Global Economic Ranking

  Trump Barrels Toward Tariff Showdown With Top Trade Partners

  Loonie Traders Position for Extreme Volatility on Eve of Tariffs

  Trump’s Mexico Tariffs Poised to Raise Already High Avocado Prices

  High Stakes for Global Companies in Trump’s Latest Tariff Threats

  High Inflation Sows Debate About New Fed Playbook for Tariffs

  Companies Issue Debt in Fast-Growing Hybrid Bond Market, Citing Ratings Benefits

  Nowhere to Hide From Trump’s Tariffs

  Trump’s Tariff Plan Could Work If It Weren’t So Broad

  Trump Tariffs Could Hurt Oil Companies and Increase Gas Prices

  Trump Faces Thorny Choice With Chevron’s Venezuela Licenses

  Exxon’s Rising Production Drives Earnings Beat Despite Oil Slide

  Green Investors Find a Silver Lining in Trump’s Presidency

  India Says China Dominance is A Risk to Clean Energy Transition

  Orsted Replaces CEO as Wind Industry Faces Challenges

  Tesla and Chinese Carmakers Could See Windfall From E.U. Emissions Rules

  Tesla’s ‘Supercharged Narrative’ Shreds Stock’s Valuation Models

  Bosch Seeks to Improve Performance Even if Conditions Are Tough

  US Probing If DeepSeek Got Nvidia Chips From Firms in Singapore

  Meta’s Zuckerberg Takes on DeepSeek With History of Topping Innovative Rivals

  Apple’s ‘Best Quarter Ever’ Leaves Much to Be Desired

  Boomers as Boogeymen: Should You Fear the ‘Silver Tsunami’?

  Ariel Investments Starts New Fund to Tap Into Women’s Sports

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• Morning News: January 30, 2025
  Eddy Elfenbein, January 30th, 2025 at 7:04 am

  Europe’s Insurers May Face New Capital Rules for Climate Risk

  Rally in Middle East Oil Has Traders Piling In at Record Level

  Tariffs Won’t Sink Canadian Oil Companies

  Shell and Equinor Production Blocked at 2 Sites Off British Coast

  Shell Keeps $3.5 Billion Buyback Amid Earnings Miss

  EU’s Frontline Nations See €100 Billion in Urgent Defense Needs

  ECB Cuts Rates With Economy at a Standstill

  Mexico Economy Shrinks for First Time Since 2021 as Risks Rise

  Trump’s Tariffs Scramble Fed’s Interest Rate Calculus

  Treasuries Rise as Traders Eye US Data After Little Fed Guidance

  White House Considers Dozens of New Ways to Seize Spending Power

  Trump Keeps World Waiting on Tariffs, Tries to Hash Out a Plan

  Tariffs Dominate Earnings Calls With Firms Bracing for Fallout

  Sahm: Even Talking About Tariffs Can Cause Inflation

  Wealth Adviser Builds $11 Billion Fortune on Goldman, TPG Deals

  Goldman Is Selling a Wealth-Advisory Unit to $240 Billion Money Manager

  Pentagon Launches Probe of Air Crash in Hegseth’s First Big Test

  DeepSeek’s AI Triumph Shouldn’t Deep-Six Chip Curbs

  Microsoft Has Kind Words for DeepSeek AI, Offers It to Customers

  SoftBank in Talks to Invest Up to $25 Billion in OpenAI

  Meta Gains After Zuckerberg Predicts ‘Really Big Year’ in AI

  Apple’s Flagging AI Hopes Get Revival From DeepSeek’s Emergence

  Russian Oligarch Held Stake in Musk’s SpaceX Through Trust While He Was Sanctioned

  Bill Gates Isn’t Like Those Other Tech Billionaires

  Comcast Sales, Profit Beat as ‘Wicked’ Lifts Film Studio

  UPS Shares Sink on Disappointing Forecast for Parcel Demand

  Cigna Tumbles After Quarterly Profit Hit by Medical Costs

  The Internet Almost Killed Barnes & Noble, Then Saved It

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• Morning News: January 29, 2025
  Eddy Elfenbein, January 29th, 2025 at 7:06 am

  Sweden’s Central Bank Cuts Rate Again, Signals It Could Be Finished Easing

  They Invested Billions. Then the A.I. Script Got Flipped.

  Meta Gave Away Its A.I. Crown Jewels. DeepSeek Vindicated Its Strategy.

  DeepSeek Is Coming for Sam Altman’s Other Company Too

  Alibaba Touts New AI Model Superior to DeepSeek’s and Meta’s

  DeepSeek Calls for Deep Breaths From Big Tech Over Earnings

  Microsoft Probing If DeepSeek-Linked Group Improperly Obtained OpenAI Data

  Leaving the W.H.O. Could Hurt Americans on a Range of Health Matters

  Trump’s Tariffs Hit US Growth Before, and Threaten to Again

  Trump Wants to ‘Impound’ Money That Congress Appropriated. Here’s What It Means

  Trump Buyouts, Spending Freezes Wreak Havoc Across Government

  In Trump’s Economy, Trump Gets to Pick the Winners and Losers

  Trump Can Have Lower Interest Rates Without Bullying the Fed

  Fed to Hold Rates Steady and Brace for Trump

  U.S. Consumers Lose Confidence at Start of Trump’s Second Term

  HSBC’s Longshot Dream of Rivaling Wall Street Comes to an End

  HSBC’s Global Brand in the Balance as It Doubles Down on Asia Bet

  If Goldman Is the Future of Diversity, We Have a Problem

  Tesla’s $600 Billion Run-Up Looks Past Major Risks to EV Growth

  Frontier Airlines Is Bidding for Spirit—Again

  T-Mobile Earnings Beat Projections on Mobile Subscriber Gains

  Corning Swings to Profit, Sees Sales Growth on AI-Driven Demand

  KKR Builds Stake in Medical-Supply Company, Reaches Deal for Board Seats

  VF Corp. Sales Top Estimates Signaling Turnaround Is Working

  Whole Foods Union Faces Tough Task to Secure Contract With Amazon

  Indy Pass, the Anti-Vail Seasonal Ski Ticket, Is Gaining Fans

  Sundance Made Park City the It Town. Not Anymore.

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• CWS Market Review – January 28, 2025
  Eddy Elfenbein, January 28th, 2025 at 6:50 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.”)

  On Monday, Wall Street got knocked back thanks to the emergence of a Chinese artificial intelligence product called DeepSeek. If the hype is real, then DeepSeek is a far cheaper alternative to the existing AI chatbots.

  Marc Andreessen went as far as to call DeepSeek a “Sputnik moment,” referring to the 1957 launch of the world’s first artificial satellite launched by the Soviet Union. The idea is that at one point, America assumed it was in the lead in the Space Race, and it quickly found out that it was not.

  Tech stocks got punished hard. On Monday the world’s 500 richest people lost a collective $108 billion.

  

  DeepSeek has apparently built a better and cheaper chatbot. Importantly, DeepSeek doesn’t require nearly as many high-end computer chips as its rivals. Pardon the tired cliché, but this could truly be a game-changer.

  The U.S. government has been working hard to restrict the number of high-end chips, like those made by Nvidia, that can be sold to China. The Pentagon, in particular, doesn’t want to see these expensive chips fall into Communist hands.

  The effort to quell the spread of these chips may have had a perverse side effect. Namely, it’s forced China to become more creative in its approach to AI technology.

  There are a few tests that American AI companies use to see how well these chatbots work, and DeepSeek passed them all. To put this in perspective, DeepSeek said it only needs $6 million in computer power to build its systems. Meta spent 10 times that.

  The investment assumption was that no one had pockets deep enough to be able to compete with the American tech companies. As a result, Nvidia was the only game in town. Well, that may not be true.

  The top AI companies need at least 16,000 chips for their systems, but DeepSeek said they only need 2,000. Interestingly, DeepSeek has open sourced its AI technologies, so anyone can build it.

  As you might gather, some politicians aren’t exactly thrilled with this. The New York Times mentioned a Berkley professor who, with his students, built an AI system called Sku-T1 that does as well as OpenAI but it only needed $450 in computer power.

  DeepSeek is run by a quant fund called High Flyer. Since DeepSeek doesn’t make any consumer products, it’s not pinned in by the U.S. government’s regulations.

  National security writer John R. Schindler wrote, “If DeepSeek’s innovation is all it’s being sold as, Beijing may have gained a decisive advantage that will enable the PLA to out-think and outmaneuver the U.S. military in any confrontation in the Western Pacific, most likely over Taiwan.”

  Nvidia Plunges 17%

  DeepSeek’s impact on the market was quick and hard. Shares of Nvidia (NVDA) fell 17% on Monday. That drop erased nearly $600 billion in market value which is the largest one-day loss for a single company in history.

  Don’t feel too bad about Nvidia. Monday’s drop is barely a blip compared with its massive rally. The AI frenzy has been driving the market for the last few years, almost to the exclusion of everything else.

  

  On Monday, the Nasdaq lost 3%. Meanwhile, the Dow closed 0.65% higher. That’s an enormous gap, and it was also reflected in the growth-value spread. On Monday, the S&P 500 Value ETF was up 1.03% while the S&P 500 Growth ETF was down 3.59%.

  Broadcom (AVGO) lost 17.4% yesterday. Oracle (ORCL) was off by 13.79%. One of our Buy List stocks, American Water Works (AWK) was the top-performing stock in the S&P 500 with a gain of 6.84%. Here’s a stat that says it all: On Monday, the S&P 500 lost 1.5% or about $1 trillion even though 70% of the stocks in the index closed higher.

  Two of our Buy List stocks got caught up in the DeepSeek selling. IESC Holdings (IESC) lost 24.57% and Amphenol (APH) fell 12.57%. Despite those hits, our Buy List outperformed the rest of the market by 79 basis points.

  Nvidia gained back about 9% in today’s trading. Many of the other big-cap tech names also did well today. Growth beat value and the Nasdaq outpaced the S&P 500. That’s to be expected the day after such a dramatic move.

  What will happen from here? Mihir A. Desai, a Harvard professor, said in the New York Times that Nvidia’s drop may only be the beginning. He claims that “Big Tech is eating itself alive” by chasing after companies that will deliver lower and lower returns.

  Consider that even after Monday’s rout, the Magnificent Seven still make up over 30% of the S&P 500’s market cap. Ten years ago, it was just 10%. Desai writes, “our tech Goliaths trade at ratios that are two to three times those of the Unmagnificent 493.”

  He thinks that investors have come to think of the Mag 7 as low-risk investments and that’s why they aren’t bothered by the high valuations. After all, the future belongs to them, right? Well….

  The problem is that the Mag 7 have used their cash flows to buy similar firms also at elevated valuations, if not more so. This has created an investment echo chamber where a small group of companies are buying themselves with little regard to anyone outside the cool kids club. Nvidia gets nearly half its revenue from the other Mag 6 stocks. “In the past three fiscal years, Apple, Alphabet, Meta, Microsoft and Nvidia have bought back a total of over $600 billion of their own stock.”

  Just because the price of a product is plunging doesn’t mean that it’s bad news for the industry. In a tweet, Satya Nadella, the CEO of Microsoft, raised the issue of the “Jevons paradox.”

  Jevons paradox strikes again! As AI gets more efficient and accessible, we will see its use skyrocket, turning it into a commodity we just can't get enough of. https://t.co/omEcOPhdIz

  — Satya Nadella (@satyanadella) January 27, 2025

  This is the idea observed by the 19th century English economist William Stanley Jevons. He noticed that as coal got cheaper, the overall demand increased, and people started to use coal in other applications. A drop in price can lead to an increase in revenue.

  Perhaps as AI costs drop, the demand will soar. Hey, it happened for coal!

  Don’t Expect a Fed Rate Cut Tomorrow

  The Federal Reserve began its two-day meeting today. The policy statement will be due out tomorrow afternoon. Spoiler alert: Don’t expect to see a rate cut. The futures market currently thinks there’s a 0.5% chance of a rate cut, but what comes next?

  That’s still up in the air, but I suspect that the Fed has rolled back its plans for rate cuts this year. What’s the rush? The economy appears to be healthy and corporate earnings are growing, although there are some concerns. For example, inflation isn’t fading away so fast.

  The Fed is probably set to pause for a few months. For the Fed’s March meeting, traders think there’s only a 30% chance of a rate cut, and for the May meeting, the odds are right at 50-50. There’s a very good chance that for all of this year, the Fed will only cut interest rates twice. I don’t know if that’s right, but it’s a big change in outlook from a few months ago.

  Earlier today, the Commerce Department released its report on durable goods. With this report, economists like to look at core capital goods which excludes aircraft and military orders. That data can be very volatile.

  For December, core capital goods orders rose by 0.5%. This number is often seen as a good proxy for investment in equipment. The data for November was revised higher to 0.9%.

  The full report said that durable goods fell by 2.2% last month, but if you don’t count aircraft and other transportation equipment, then orders rose 0.3%.

  On Thursday, we’ll get our first look at the Q4 GDP report. The consensus on Wall Street is that the U.S. economy grew in real annualized terms of 2.7%. If that’s correct, then it will be the final data point on a good year for the economy. If the GDP report comes in above expectations, then it would be another indicator that the Fed doesn’t need to be in a hurry to cut interest rates.

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

  – Eddy

• Morning News: January 28, 2025
  Eddy Elfenbein, January 28th, 2025 at 7:05 am

  Tech Stock Rout Hits Asia as Europe and U.S. Stabilize

  There’s a DeepSeeking Whale in Nvidia’s Moat

  Chinese Quant Whiz Built DeepSeek In The Shadow Of a Hedge Fund Rout

  DeepSeek Chief’s Journey From Math Geek to Global Disruptor

  Nvidia’s Stock Crash Solves a Wall Street Puzzle

  DeepSeek Challenges Everyone’s Assumptions About AI Costs

  Black Swan’s Taleb Warns Nvidia Rout Is ‘Hint of What’s to Come’

  World’s Richest People Lose $108 Billion After DeepSeek Selloff

  DeepSeek Is No Chat(Xi)PT. For Now

  SAP Could Use Chinese AI Models if They Pass Tests, CFO Says

  AI’s Electricity Demand Means Cool New Tech Is Coming to Boring Grids

  Turkey Plans to Raise Tax on Lira Deposits to Cut Budget Deficit

  Irish Economy Contracts Ahead of Threat From U.S. Tax and Tariff Changes

  HSBC to Shutter Some Investment Banking Units in Europe, US

  Wall Street Asks SEC to Extend Timeline for US Treasury Market Overhaul

  The Fed Is About to Hit Pause on Rate Cuts. Here’s Why

  Fed’s Tariffs Response Hinges on Where Americans Think Prices Are Headed

  Trump Renews Universal Tariff Threat to ‘Protect Our Country’

  Trump Threatens Tariffs Over Immigration, Drugs and Greenland

  Musk’s DOGE Pledge Puts Spotlight on His Own Companies’ Spending

  Boeing Signals Portfolio Review After $14 Billion Cash Drain

  RTX Beats Quarterly Profit Estimates, Offers Muted 2025 Outlook

  JetBlue Loss Narrower Than Expected on Revenue, Lower Costs

  GM Sees Better-Than-Expected Profit After Shuttering Cruise

  G.M. Has Plans Ready for Trump’s Canada and Mexico Tariffs

  Tiffany Workers Mock Forced ‘Joy’ That Exacerbated Staff Exits

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• Morning News: January 27, 2025
  Eddy Elfenbein, January 27th, 2025 at 7:07 am

  Another Chinese Builder Is Facing a Cash Crisis

  EU Likely to Delay Russian Fuel Phase-Out Plan by a Month

  ECB’s Lagarde Warns Over Cost of Losing Independence

  Trump Seems Bent on Killing Off Multilateralism

  Arabica Coffee Prices Hit New High on U.S., Colombia Tariff Spat

  Trump to Hold Off on 25% Colombia Tariffs, Reaches Deal on Migrants

  Destabilizing Mexico Would Make the US Less Safe and Wealthy

  World Bank President Cautions Against Hasty Reaction to Trump Policies

  Lawyer Group Urges Overhaul to Ease US Process for Setting Up New Banks

  The Three Forces Shifting the Investment Landscape

  DeepSeek Buzz Puts Tech Stocks on Track for $1.2 Trillion Drop

  What Is China’s DeepSeek and Why Is It Freaking Out the AI World?

  DeepSeek and Masa Son Have Lessons for Stargate

  Musk’s DOGE Sets Up Conflict-of-Interest Clash for Billionaire

  Working Americans Turn to Food Banks as Fed Inflation Battle Drags On

  Maersk, MSC Go Head-to-Head in Hunt for Shipping’s White Whale

  Citi Analysts Say Trump Can’t Reverse Energy Transition

  Tesla, BMW Sue EU After China-Made EVs Are Hit by Trade Curbs

  Emerson Electric Agrees to Acquire Remaining Aspen Technology Stock in $7.2 Billion Deal

  Activist Ancora Pushes U.S. Steel to Drop Merger With Nippon Steel, Oust CEO

  Natural-Gas Firm Diversified Energy Strikes Deal for Permian Basin Player

  Building-Products Distributor QXO Launches Hostile Bid for Beacon

  AT&T Tops Estimates on Boost in Phone, Internet Subscribers

  Starbucks Bets on Mugs, Macchiato Art in Test of CEO’s Vision

  Starbucks’ Mideast Franchise Says Stake Sale Talks on Hold

  How Tech Helped Levi’s Ride the ‘Baggy Jeans’ Trend

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• Morning News: January 24, 2025
  Eddy Elfenbein, January 24th, 2025 at 7:01 am

  Brazil Inflation Slows Less Than Expected Despite Cheaper Energy

  Japan Hikes Rates, Solidifying Exit From Rock-Bottom Borrowing Costs

  Hawkish Bank of Japan Signals Will Buoy Yen, Strategists Say

  Dividend Surge Signals Culture Shift in China’s Markets

  European Commission Calls For Sweeping Red-Tape Reforms To Compete With U.S., China

  How the World Is Preparing for Trump’s Tariffs

  Trump Would ‘Rather Not’ Put Tariffs on China, Maintains Threat

  Strong Dollar Could Worsen U.S. External Deficit

  Will the Dog That Barked in the Nighttime Also Bite?

  Wall Street Enters Darker Age With Most Stock Trading Now Hidden

  Larry Fink Ponders If US Economy Is Pointing to Rate Hikes Later

  American Express Earnings Expand With Holiday Shopping Boost

  Why Trump’s Inner Circle Is So Divided on H-1B Visas

  Egg Prices Are High. They Will Likely Go Higher.

  Trump’s Inflation Fix Centers on Energy Emergency That Doesn’t Exist

  LA Fires ‘Not Likely to Be Material’ for Reinsurers, Fitch Says

  If You Need to Escape a Wildfire in an EV, Here Is What to Know

  Polestar Boss Contends With Trump Shaking Up the EV Race

  For Investors, the Business of America Is Still Business

  How Trump’s Assault on DEI Will Ripple Across Corporate America

  Billionaire Ambani is Building World’s Biggest Data Center

  Meta, TikTok Set for EU Stress Test Ahead of German Elections

  Oracle, Apple, Google Diverge on Whether to Keep Serving TikTok

  $3,000 for a Used iPhone? If It Has TikTok, Maybe.

  Elon Musk’s Air Force One Scrutiny Tests Boeing’s Path to Recovery

  Luxury Needs Its Logos Back. Trump Can Help

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• Morning News: January 23, 2025
  Eddy Elfenbein, January 23rd, 2025 at 7:01 am

  Mideast Billions Turn Heads in Davos, From Blackstone to Beckham

  One by One, World Leaders in Davos Fall in Line in Trump Era

  WTO Chief Ask Everyone to ‘Chill’ as Tariff Threats Swirl

  Cheap, Not Trump, Is Why European Stocks Are Spiking

  Turkey Central Bank Cuts Rates Again as Inflation Cools

  China’s Latest Bid to Boost Stocks Barely Moves the Needle

  Where Economists Think the Trump Economy Is Headed

  Trump Will Regret Designating Narcos as Terrorists

  Are US Taxes Too High or Too Low? Choose Your Chart

  Trump Sees National Emergencies Where Experts Say There Are None

  Trump Maps Pivot From Quick Wins to Harder, ‘Solvable’ Problems

  Trump’s Death Penalty Order Is a Message to the Supreme Court

  Crop Trader Declares Force Majeure Along US Gulf During Rare Southern Snow

  A New Era of Fire Diplomacy

  California’s Recovery Must Price In the True Cost of Risk

  Trump’s D.E.I. Order Creates ‘Fear and Confusion’ Among Corporate Leaders

  Why Trump Pardoned ‘Silk Road’ Founder Ross Ulbricht

  When A.I. Passes This Test, Look Out

  Abu Dhabi’s MGX Helps Bankroll Trump’s $100 Billion AI Plan

  Oracle Takes Run at Cloud’s Big Three With Trump-Backed AI Pact

  GE Aerospace Tops Profit Estimates, Plans $7 Billion Buyback

  American Air Sees Surprise Loss in Break From Bullish Rivals

  American Airlines Outlook Clouds 4Q Results That Beat Wall Street’s Estimate

  Forget Factories, Small US Towns Want Buc-ee’s Gas Stations

  Some Walmart Managers Get a Raise, Lifting Their Max Pay Above $600,000

  Bitter Boardroom Feud for Korea Zinc Takes a Dramatic Turn

  A Start-Up Claimed Its Device Could Cure Cancer. Then Patients Began Dying.

  Wembanyama Prepares to Become ‘Genuine’ Face of the N.B.A.

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• Morning News: January 22, 2025
  Eddy Elfenbein, January 22nd, 2025 at 7:03 am

  India’s Economy Slows Down Just When It Was Supposed to Speed Up

  Investors Hopeful for Ukraine But Need Security, Deputy PM Says

  Trump’s Paris Accord Abandonment Is a Moral Disgrace

  Trump’s Climate Pullback Endangers Crucial Funds for Poor Nations

  Trump Wants to Unleash Energy, as Long as It’s Not Wind or Solar

  Trump Aim of Bringing Home Manufacturing a Questionable Strategy, Lagarde Says

  EU Sees Deals to Be Done With Trump and Sparring Over Tech

  Davos Is Learning the ‘Art of the Deal’ With Trump

  Trump Says He Intends to Impose 10% Tariffs on Chinese Imports on Feb. 1

  Taking Trump’s Tariffs Threats Seriously and Literally

  North American Free Trade Is Already Great Again

  Trump’s Sharp Turn for US Policy Faces a Slower Road in Congress

  How the Debt Could Hamstring Trump’s Agenda

  Trump and Biden Find Common Ground in Abusing Their Pardon Powers

  LA Fires Revive Trauma for Homeowners Battling Insurance Claims

  Norway $1.8 Trillion Fund CEO Sees Contrarian Bet in US Tech

  Trump’s All-In AI Push Aims for Global Mastery: Balance of Power

  Elon Musk’s Silence on the Risk of AI Doom Is Deafening

  Google Invests Another $1 Billion in AI Developer Anthropic

  Trump Says He’s Open to Elon Musk or Larry Ellison Purchasing TikTok

  MrBeast, Internet’s Top Creator, Joins New Bid to Buy TikTok

  Netflix Explodes Into a New Era

  J&J Tops Quarterly Profit Estimates on Cancer Drug Sales

  Abbott’s First-Quarter Outlook Misses Estimates, Shares Down

  Procter & Gamble Earnings Beat Estimates as Shoppers Buy More Household Staples

  China Welcomes Back Hollywood Films in Bid to Boost Spending

  Barry Callebaut Stock Melts as High Cocoa Prices Weigh on Sales Volume

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• CWS Market Review – January 21, 2025
  Eddy Elfenbein, January 21st, 2025 at 6:45 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.”)

  Last year, the stock market averaged one new high a week, but over the last six weeks, there have been zero new highs. Not a single one. For the first time in a while, the stock market appears apprehensive. The market isn’t good or bad, but it’s choppy. It seems like the index can’t muster enough momentum to go in either direction for very long.

  Of course, by historical standards, this is perfectly normal. This is what markets do: they bounce around. The unusual period is the one we recently left. Consider that from October 2022 until last month, the S&P 500 Total Return Index gained 75%. That’s not bad for a little over two years’ work.

  Just understand that from an investor’s perspective, that was the odd period, not what we’re seeing now. As of Tuesday’s close, the S&P 500 was about 0.75% away from a new all-time high close. It may come tomorrow. As we know, the market gods have a habit of doing the unexpected.

  

  There are a number of signs that suggest that the U.S. economy is healthier than many think. It’s odd how not that long ago, it was assumed that the economy was about to fall on its face. I continue to be amazed by the very poor relative performance of the defensive sectors. Consumer staples and health care stocks, in particular, have badly lagged the market. That’s not what you’d expect to see in a recession or even a late-cycle market.

  When you see stalwart blue chips Colgate-Palmolive (CL) and Johnson & Johnson (JNJ) lag the market, I’m inclined to think it says something about the market’s appetite for risk and not much about Colgate and J&J themselves.

  While the Mag 7 gets a lot of attention, the tech sector as a whole hasn’t done that well, in a relative sense, over the past year. Instead, we’ve seen impressive relative strength in areas like industrial stocks. Materials are also doing well. These are classic cyclical areas of the market. No one, it seems, wants to hold the steady stalwarts.

  On our Buy List, stocks like Miller (MLR) and Mueller (MLI) are both up more than 4% this year. Allison Transmission (ALSN) is already an 11% winner for us this year.

  How about IES Industries (IESC)? The company has a market value of $5 billion, 9,000 employees, and it’s not followed by any analysts on Wall Street. It’s up 37% this year!

  We’ll soon learn a lot more about these companies when they report earnings. Now let’s look at some details from earning season.

  It’s Early but Q4 Earnings Are Looking Good

  The Q4 earnings season is starting to heat up. We’ve already had our first few reports, and that will soon turn into a flood.

  I should explain that Q4 earnings season is slightly different than the earnings seasons of the other quarters. Companies are allowed a little more time to report their full-year results. That means that Q4 earnings season is longer, and it stretches well into February.

  After the closing bell today, we got a very good earnings report from Netflix (NFLX). The stock is up $115 per share, or 13% in after-hours trading.

  For this earnings season, we have some early numbers. According to FactSet, 9% of the S&P 500 has reported so far. Of that, 79% have beaten their earnings reports and 67% have beaten sales. That’s quite good.

  

  So far, earnings growth is tracking at 12.5%. Again, that’s early, but if that number holds, it will be the strongest growth we’ve seen since Q4 of 2021, which was severely impacted by Covid.

  Only one stock so far has issued negative guidance, but four have issued positive guidance.

  The forward P/E Ratio for the S&P 500 now stands at 21.6. That’s not extreme, but it’s higher than the market’s five and ten-year averages (19.7 and 18.2, respectively). Overall, there’s little reason for alarm, especially if earnings continue to grow as they have.

  Watch Out for Value Traps

  Shares of Walgreens Boots Alliance (WBA) got knocked down by 9% today. The Justice Department said it’s suing Walgreens claiming that the pharmacy chain unlawfully filled prescriptions for addictive painkillers.

  The DOJ has already gone after CVS. The opioid epidemic has been a major problem for several years. According to the U.S. government, from 1999 to 2022, there were nearly 727,000 deaths from opioid overdosing.

  The lawsuit alleged that by knowingly filling unlawful prescriptions for controlled substances, Walgreens violated the Controlled Substances Act. The government also alleged it violated the False Claims Act when it then sought reimbursement from federal health care programs, like Medicare, for the prescriptions.

  The lawsuit was announced after Walgreens filed its own lawsuit on Thursday challenging what it said were new policies the U.S. Drug Enforcement Administration had unlawfully adopted, seeking to ensure pharmacies do not dispense controlled substances for medically illegitimate purposes.

  CVS had to write a big check, and I suspect that Walgreens will have to do the same. Two weeks ago, WBA reported good earnings for its fiscal Q4. The company made 51 cents per share which topped expectations of 38 cents per share.

  I’m highlighting WBA because it’s a good example of a “value trap.” By that, we mean a stock that has the outward appearance of being an inexpensive stock based on conventional valuation metrics. WBA certainly fits that. It’s going for seven times this year’s earnings, but it’s not a value stock. It’s wildly overvalued once you factor in its legal realities.

  Over the last 10 years, the S&P 500 has more than tripled while Walgreens is down by 80%. This is an important lesson for investors. Whenever we see a stock that seems to be going for a low valuation, we need to ask why. There may be a very good reason why.

  Don’t Count the Economy Out

  We recently got a good jobs report. The government said that the economy created 256,000 net new jobs last month. That beat expectations of 155,000. The unemployment rate fell by 0.1% to 4.1%. The jobless rate has been below 4.3% for the last 38 months in a row.

  Last week, the Bureau of Labor Statistics said that inflation increased by 0.4% last month. Despite the higher headline rate, core inflation, which excludes food and energy, increased by 0.2% last month. That was 0.1% below expectations. Over the past year, core inflation is running at 3.2%.

  Not too long ago, Wall Street assumed that the Federal Reserve would be slashing interest rates this year. That may not be the case. The Fed meets again next week, and you can forget about any rate cuts coming. The futures market currently thinks there’s a 0.5% chance of an interest rate cut. I think that’s about 0.49% too high, but that’s only a guess.

  For the meeting after that, coming in March, futures traders think there’s only a 26% chance that the Fed will cut interest rates. Traders don’t see a cut coming at the May meeting, either. They think the first cut will come in the middle of June.

  Remarkably, that’s the only Fed interest rate cut that traders expect all year. This is a huge change in sentiment from just a few weeks ago. If earnings continue to grow as they are now, what’s the point of cutting rates?

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

  – Eddy