Morning News: November 8, 2018
Posted by Eddy Elfenbein on November 8th, 2018 at 7:09 am

Strong Dollar Hits China’s Foreign-Exchange Reserves

Respect Our Choices, China’s Xi Says Ahead of Trump G20 Meeting

‘Fed Is in Denial’: How a $4 Trillion Dilemma Could Get Ugly

Why Corporate America Is Content With the Midterms

What Democratic Control of the House Could Mean for Your Wallet

Tesla Names New Chair As Elon Musk Steps Down

Google Plans Large New York City Expansion

Two Hong Kong Companies in Lose More Than 75% of Value

Why the Google Walkout Was a Watershed Moment in Tech

UBS Faces New Legal Battle in U.S. Over Mortgage Securities

Roku Stock Falls Late Despite Beating Third-Quarter Estimates

Berkshire Hathaway’s Profits Are Not What You Think They Are

Ben Carlson: Spirit Animal

Michael Batnick: I Remember When

Blue Harbinger: Do You Trade Binary Events?

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Morning News: November 7, 2018
Posted by Eddy Elfenbein on November 7th, 2018 at 7:16 am

Markets Got the Midterms Right. Now What Happens?

What the Election Results Mean for Business

Job Openings Outnumbered Unemployed Americans by More Than One Million in September

Looking for Higher Yields? Try Lending Money

Russian Trolls Were at It Again Before Midterms, Facebook Says

A $240-Billion-a-Day Market Is Leaving London Ahead of Brexit

Shanghai Is Being Thrust Into the High-Stakes Tech I.P.O. Race

How Apple Is Losing Its Grip on India

Ahold Ups Stakes in U.S. Grocery War With Mini-‘Robot Supermarkets’

EU Approves Disney’s $71 Billion Acquisition of Fox, But Disney Will Have to Get Rid of Networks Like History and Lifetime

CVS Lays Out Vision for Future as Aetna Merger Looms

Dish Revenue Falls 5% as Satellite Subscribers Drop

Nick Maggiulli: The McRib Effect

Jeff Carter: Was It The Banks Fault?

Cullen Roche: Three Things I Think I Think – What In the Hell is Going On Out There?

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The Math Hustle
Posted by Eddy Elfenbein on November 6th, 2018 at 10:23 pm

Institutional Investor has a very good article on Wall Street’s abuse of math. Let me explain. Financial economics has an inferiority complex. As a result, the field needlessly uses fancy math to justify itself. This seeps into money management.

The financial industry uses mathematics in a manner that would be mortifying to any other field of science. Academic literature and industry research are rife with pseudo-mathematical nonsense. You don’t have to look far to see where the motivation lies: Many of the authors are either employed by or retained by richly paid investment management and consulting firms. Faced with soaring investor interest in algorithm-powered investment strategies, the habit — indeed, the requirement — today is for firms to use scientific language and notation to nourish the idea that they’ve proved mathematically that there’s a way to systematically beat the market.

They haven’t.

It’s not surprising that more is claimed by their suggestive language than they actually “prove” because the field suffers from a subtle corruption. There is a pattern developing of publishing a semi-quantitative paper and using it as the basis to establish an investment advisory firm, become the seller of an investment product “relying only on math,” and go off on a globe-circling marketing bender. The fastest-growing asset management firms are purveyors of investment products that draw upon mathematical finance research, so theories ridden with poorly specified mathematics and wildly exaggerated results abound.

Becton, Dickinson Earns $2.93 per Share
Posted by Eddy Elfenbein on November 6th, 2018 at 7:37 am

This morning, Becton, Dickinson (BDX) reported fiscal Q4 earnings of $2.93 per share. That matched Wall Street’s estimates. It was also a nice increase from $2.40 per share one year ago. This was a big year for BDX because it was the first year they’ve operated after absorbing CR Bard. For the year, Becton made $11.01 per share. Adjusting for the acquisition, revenues were 5.8% for the fiscal year.

“Fiscal 2018 was a historic year for BD with the successful completion of the acquisition of C. R. Bard. We are extremely proud of our strong fourth quarter and fiscal year results, which demonstrate how agile we can be as an organization while executing concurrently on two transformative acquisitions,” said Vincent A. Forlenza, Chairman and CEO. “We enter fiscal 2019 with continued strong momentum and confidence in our ability to execute on our strategy, deliver on our commitments and create value for our shareholders.”

In fiscal 2017, Becton made $9.48 per share. Last November, the company originally pegged EPS for fiscal 2018 at $10.55 to $10.65. In February, they bumped the range up to $10.85 – $11 per share. In May, they raised the range again to $10.90 – $11.05 per share. Then in August, it went to $10.95 – $11.05 per share. Ultimately, they made $11.01 per share.

For the current fiscal year, BDX expects earnings between $12.05 and $12.15 per share. They’re looking for adjusted revenue to rise by 5% to 6%.

Morning News: November 6, 2018
Posted by Eddy Elfenbein on November 6th, 2018 at 6:51 am

Italy Gets a Warning From the 14th Century

Iran Sanctions and Oil Prices: Who’ll Feel the Pain?

China’s Trade Olive Branch Can’t Dispel Fears of Clash With U.S.

Amazon Plans to Split HQ2 Evenly Between Two Cities

Crazy Work Hours and Lots of Cameras: Silicon Valley Goes to China

Apple’s Asia Suppliers Fall on Report iPhone XR Production Boost Canceled

Ford Goes Local in India, Aims for Bigger Slice of Competitive Market

Boeing, Airbus Fret Over Trade War as China Displays Aviation Ambitions

Verizon to Break Up Wireless Unit in Reorganization

The Airline Most Famous for $55 Flights from the US to Europe Has Been Purchased By Its Greatest Rival

Drugmaker Lilly’s Third-Quarter Profit More than Doubles

How Bill Gates Aims to Save $233 Billion by Reinventing the Toilet

Michael Batnick: Gratitude

Joshua Brown: Will the Stock Market Celebrate Gridlock?

Howard Lindzon: Momentum Monday…The FANG/FAANG Blues and Mood Matters

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RIP: Evelyn Y. Davis
Posted by Eddy Elfenbein on November 5th, 2018 at 11:04 am

Evelyn Y. Davis, one of Wall Street’s true characters, has passed on, aged 89. She was known as the original shareholder activist, which is a polite way of saying she grilled CEOs at shareholder meetings.

It’s a basic rule of our free enterprise system that if you own shares in a company, you are the owner. As a result, you’re fully within your right to question management. And question, Ms. Davis did.

For more than five decades, the Netherlands-born Ms. Davis attended annual meetings of Bank of America, Ford Motor Co. and Goldman Sachs Group Inc., among many other companies, to offer advice and demand changes. She advocated lower pay for executives and term limits for directors. Sometimes she advised CEOs to resign or commented on their looks.

At a Goldman Sachs annual meeting in 2011, when the investment bank was still facing regulatory and legal fallout from the 2008 financial crisis, she advised the CEO, Lloyd Blankfein, to step down. “I want people to know I have nothing against you personally,” she told Mr. Blankfein. “And you are not a bad-looking guy.”

Mr. Blankfein replied that he had no plans to resign.

She held stock in more than 80 companies and published an annual newsletter, Highlights and Lowlights, to recount her tussles with top executives. She charged $600 an issue and insisted that companies buy at least two copies.

Morning News: November 5, 2018
Posted by Eddy Elfenbein on November 5th, 2018 at 7:04 am

Big Short’s Eisman Is Shorting Two U.K. Banks on Brexit

Despite Killing, SoftBank Chief Sees ‘Responsibility’ to Invest in Saudi Arabia

Iran Says It Will Resist ‘Economic War’ as U.S. Revives Curbs

Xi’s Swipes at Trump Show China Standing Its Ground in Trade War

China Seeks Allies as Trump’s Trade War Mounts. It Won’t Be Easy.

Fading Hopes for U.S.-China Trade Truce Hit Markets

Their Soybeans Piling Up, Farmers Hope Trade War Ends Before Beans Rot

Jack Ma Says the Trade War Is the ‘Most Stupid Thing’

Amazon Drops Free Shipping Minimum in Tussle for Holiday Sales

Should You Buy Or Sell Apple For No Longer Disclosing iPhone Sales Numbers?

How Hyundai Motor, Once a Rising Star, Lost its Shine

Fewer Stars to Rise at Goldman Sachs as Partnership Class Shrinks

Ben Carlson: Tiny Improvements, Big Results

Cullen Roche: No, The Government Didn’t Cause Unemployment

Jeff Miller: Storm Warnings

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October NFP = +250K; Unemployment = 3.7%
Posted by Eddy Elfenbein on November 2nd, 2018 at 9:03 am

The October jobs report is out! The US economy created 250,000 net new jobs last month. Wall Street had been expecting 190,000. The unemployment rate stayed at 3.7%.

The ranks of the employed rose to a fresh record 156.6 million and the employment-to-population ratio increased to 60.6 percent, the highest level since December 2008, according to the department’s household survey. That headline jobless number stayed level even amid a two-tenths of a percentage point rise in the labor force participation rate to 62.9 percent.

Those counted as outside the labor force tumbled by 487,000 to 95.9 million.

But the bigger story may be wage growth, which has been the missing piece of the economic recovery. Average hourly earnings increased by 5 cents an hour for the month and 83 cents year over year, representing a 3.1 percent gain. The annual increase in wages was the best since 2009.

That number is being watched closely by Federal Reserve, which has increased its benchmark interest rate three times this year and is on track for a fourth quarter-point hike in December. Higher wage growth feeds into the central bank’s desire to raise rates to keep inflation under control.

Here’s the year-over-year increase in average hourly earnings. It finally topped 3%.

U-6, which is a broader measure of unemployment, fell to 7.4%. The futures market is indicating a strong open.

Health care showed some of the biggest gains for the month, adding 36,000. Manufacturing contributed 32,000, thanks to a gain in durable goods and in particular transportation equipment, which added 10,000.

Construction also rose sharply, with an increase of 30,000 while transportation and warehousing jumped by 42,000.

In addition, leisure and hospitality was a strong contributor, with 42,000 new positions after being unchanged in September, due likely to Hurricane Florence, the government report said.

Professional and business services increased by 35,000, bringing its 12-month total gain to 516,000, and mining added 5,000.

Job growth skewed by full-time positions, which rose by 318,000, while part-time jobs increased by 242,000, according to the household survey.

Another closely watched internal metric, the average work week, increased 0.1 hour to 34.5 hours.

CWS Market Review – November 2, 2018
Posted by Eddy Elfenbein on November 2nd, 2018 at 7:08 am

“It’s waiting that helps you as an investor, and a lot of people just can’t stand to wait.” – Charlie Munger

October has mercifully come to an end. The S&P 500 shed nearly 7% during the month making it the worst month for stocks in seven years. The Nasdaq suffered even more. The tech-heavy index was down over 9% for the month.

The good news is that there’s been some relief lately. The S&P 500 has rallied more than 1% for the last three days. That hasn’t happened in more than two years, but don’t think the storm has passed. As long we’re below the 200-day moving average—and we are—then there’s a threat that we’ll move lower. The market loves to “test” its low once or twice before making its next move.

In this month’s issue we have several Buy List earnings reports to cover. Some were good (Church & Dwight), others were not (Carriage Services). I’ll sort it out for you. We also have two more earnings reports next week that will be our final reports for this season. Now let’s take a closer look at the broad market.

The End of Red October

October was a very bad month for stocks. The major event came on October 3 when Fed Chairman Jay Powell said that we’re a “long way” from neutral. The markets took the clue. Later this month, we learned that mortgage rates touched a seven-year high. After that, we got a bad housing report which spooked the bulls even more.

I think the market has forgotten that housing can have a bad year. Not every slowdown means a global bust-up like we had ten years ago. But lately, just about any stock related to housing has felt the pain. With the general market wooziness, some tech stocks have been caught up in the selling, but most of the damage has been related to anything involved in construction. The S&P 500 Materials Sectors dropped 16% in a little over one month.

The market had a dramatic turnaround this week. From Monday’s low to Thursday’s close, the Dow gained more than 1,250 points. I tend to be wary of such strong “contra-trend” moves, especially when there’s so little to justify it. On Monday, the stock market had a pronounced reversal. A morning rally was wiped out. The difference between Monday’s high and low was over 900 points. On Monday, the S&P 500 got as low as 2,603.54. That’s 11.5% below the intra-day high from September 21.

The key for investors is the 200-day moving average. Historically, volatility is much higher below the 200-DMA than above it. Even with this week’s nice bounce, the S&P 500 is still about 1% below its 200-DMA. But a short burst is not a convincing move. Expect to see the S&P 500 back below 2,650 soon. Until then, make sure you have a well-diversified portfolio of high-quality stocks. Now let’s take a look at a busy week of earnings reports.

Eight Buy List Earnings Reports

We had another big batch of earnings this week (here’s our earnings calendar). Let’s start with Moody’s (MCO) which reported last Friday. For Q3, the company earned $1.69 per share, an eight-cent miss. That’s unusual for Moody’s. The company said that non-financial corporate debt issuance slowed down last quarter.

Even though this was an earnings miss, Moody’s earnings were still up 11% from a year ago. The company lowered its full-year range to $7.50 – $7.65 per share. That implies a Q4 range of $1.74 to $1.89 per share. On Friday, shares of Moody’s dropped nearly 9%. Fortunately, the stock made up a lot of lost ground this week. MCO gained more than 3% on Wednesday and then another 3% on Thursday. I’m dropping my Buy Below on Moody’s to $162 per share.

On Tuesday, we had two more reports. First up is Cognizant Technology Solutions (CTSH). For Q3, the IT outsourcer earned $1.19 per share. That beat estimates by six cents per share. The company had told us to expect earnings of at least $1.13 per share. Revenue rose 8.3% to $4.88 billion.

For Q4, Cognizant sees earnings of at least $1.05 per share and full-year earnings of at least $4.50 per share. That’s a bit light. The Street had been expecting $1.14 for Q3 and $4.53 for the year. Cognizant sees Q4 revenue between $4.09 billion and $4.13 billion.

The stock fell close to 4% on Tuesday, but it gained nearly all of it back on Wednesday. Cognizant is doing just fine. This week, I’m lowering our Buy Below to $74 per share.

Also on Tuesday morning, Wabtec (WAB) said they made 95 cents per share for Q3 which matched estimates. This is a crucial time for WAB with the big merger coming. Frankly, any merger news probably outweighs earnings news at this point.

Wabtec said they now expect full-year 2018 earnings of $3.85 per share which excludes merger costs. The company is aiming for a 13% operating margin and $200 million in cash flow. The CEO said he expects a strong Q4 and that the freight business continues to show strong growth. The merger with GE Transportation is expected to happen in early 2019. There will be a special shareholder meeting to vote on the deal on November 14.

I wasn’t as disappointed with this report as traders seemed to be. Shares of WAB dropped about 9% over Tuesday and Wednesday, but rallied some on Thursday. I still like this stock, but I’m dropping our Buy Below to $91 per share.

Earnings from ICE, Fiserv and Carriage

We had three earnings reports on Wednesday. Before the bell, Intercontinental Exchange (ICE) reported Q3 earnings of 85 cents per share. That was five cents ahead of expectations. Total revenue, excluding transaction-based expenses, rose 4.7% to $1.2 billion. Also, the board of directors authorized a new share-buyback program of $2 billion.

This was a good quarter for ICE. The company noted that it was the 22nd quarter in a row of year-over-year revenue growth. ICE didn’t offer any financial guidance. The company is also in the midst of a regulatory battle on the future of data fees. This is a very profitable business for ICE and the other exchanges, but the fight over regulations will probably wind up in the courts. The stock jumped 5.4% on Wednesday. ICE remains a solid buy up to $79 per share.

After the closing bell on Wednesday, Fiserv (FISV), “a leading global provider of financial-services technology solutions,” reported third-quarter earnings of 75 cents per share. That was two cents below estimates. In last week’s issue, I said I had been expecting an earnings beat from Fiserv.

Despite the earnings miss, Fiserv is having a generally good year. For the first nine months of this year, Fiserv has made $2.26 per share. Operating margin dipped to 31.6%, but that’s still quite good.

Fiserv also raised the lower end of its full-year guidance. The range had been $3.02 to $3.15 per share. Now it’s $3.10 to $3.15 per share. That represents growth over last year of 25% to 27%. That also translates to a Q4 range of 84 to 89 cents per share. Wall Street had been expecting 86 cents per share. This year looks to be Fiserv’s 33rd year in a row of double-digit earnings growth. The stock took a 5.5% bath on Thursday, but don’t let the earnings miss scare you. Fiserv is a buy up to $81 per share.

The report from Carriage Services (CSV) was a disaster. There’s no way to put a positive spin on this one. The stock plunged 21.5% on Thursday. When the weak Q2 report came out, management said the issues were temporary, and that they will experience “broadly higher performance during the latter part of the second half of the year.” That was wrong.

I took management’s word, and that was a big mistake. For Q3, Carriage earned 14 cents per share which was far below consensus of 22 cents per share. That’s down from 25 cents per share one year ago. I’m dropping my Buy Below down to $14 per share. You’ll notice that I’m not much bothered by a small earnings miss from companies like Fiserv because I have faith in the company’s management. Not so with Carriage. I apologize for this one.

Church & Dwight and Ingredion

Church & Dwight (CHD) may be our star pupil this earning season. On Thursday, the consumer-brand powerhouse reported Q3 earnings of 58 cents per share. That beat estimates by four cents per share. Net sales rose 7.2% to $1.04 billion.

Consumer Domestic, which is CHD’s largest unit, saw net sales growth of 7.6%. Business growth was led by Arm & Hammer. I was pleased to see the company raise its estimate for full-year organic revenue growth from 3.5% to 4.0%.

For Q4, CHD expects earnings of 57 cents per share which makes the full-year total $2.27 per share. The stock jumped over 9% on Thursday. Church & Dwight qualified as my only Buy Below price increase this week. I’m lifting our Buy Below on CHD to $70 per share.

Last week, Ingredion (INGR) warned that Q3 earnings would be about $1.70 per share which was 26 cents less than what Wall Street had been expecting. The company also lowered its full-year guidance from a range of $7.50 to $7.80 per share to a new range of $6.80 to $7.05 per share. The company blamed weak currencies in developing markets plus power outages in North America. Ingredion said it will require more than one quarter to recover.

On Thursday, Ingredion confirmed that they did, in fact, make $1.70 per share last quarter. The company didn’t offer much more in specifics outside what we already know. The plan is to invest more in its specialties portfolio. I afraid I’m skeptical about Ingredion’s plans. I had been expecting to hear more concrete plans from them.

Two More Buy List Earnings Reports Next Week

We have our final two earnings reports next week. Becton, Dickinson (BDX) had a strange reaction to its last earnings report. The stock initially dropped but then regained its composure and proceeded to rally strongly to a new high. The good times ended in October when the stock pulled back sharply. I actually don’t mind seeing BDX at a discounted price.

The next BDX earnings report is scheduled for Tuesday, November 6. In August, BDX reported $2.19 per share for Q2. That beat the Street by three cents, and it was up 18.3% over last year. Becton also raised their revenue guidance for this year. Plus, they bumped up the low end of their full-year forecast. Becton now sees full-year EPS of $10.95 to $11.05 from a previous range of $10.90 to $11.05. For Q3, the consensus on Wall Street is for $2.93 per share.

Continental Building Materials (CBPX) is due to report on Thursday, November 8. Continental was our worst-performing stock last month. For October, CBPX shed more than one-quarter its value. At one point during the summer, we had nearly a 40% YTD gain in Continental. A few days ago, it was negative on the year for us. More remarkably, we didn’t hear anything from the company. As a wallboard stock, it’s certainly tied to the housing sector.

The last earnings report in August was quite good. CBPX made 59 cents per share which was 14 cents more than estimates. Net sales were up 15.5%, while EBITDA rose more than 21%. Gross margins improved to 29.4% from 25.5%. It’s not just about price increases; wallboard sales volume rose from 647 million square feet last year to 722 million square feet this year. The consensus on Wall Street is for earnings of 48 cents per share.

That’s all for now. The big news next week will be the mid-term U.S. elections on Tuesday. There will also be another Federal Reserve meeting on Wednesday and Thursday. Don’t expect to see any move on interest rates. The policy statement will come out on Thursday at 2 pm ET. I’m also curious to see Monday’s ISM Non-Manufacturing Index. The last report was the highest since the index was created ten yeas ago. Be sure to keep checking the blog for daily updates. I’ll have more market analysis for you in the next issue of CWS Market Review!

– Eddy

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Morning News: November 2, 2018
Posted by Eddy Elfenbein on November 2nd, 2018 at 7:03 am

A Synchronized Slowdown Is Looming

U.S. Oil Prices Fall to Lowest Since April

Trump Asks Cabinet to Draft Possible Trade Deal With China

Start-Ups Ask, ‘Are We Making Money for Saudi Arabia?’

Apple Warns on Holiday Sales, Sending Value Below $1 Trillion

Apple Silence on iPhone Unit Sales Sparks Concern, Shows Future

Boeing Eyes Services M&A, Small or Big, in Tussle with Airbus

Ford, Volkswagen Explore Venture to Challenge Tesla, Waymo

Starbucks Satisfies Investors With Stronger Sales, but Traffic Still Weak

Why Wait for Black Friday? Target and Walmart Just Launched Massive Holiday Sales

Succession at CBS Will Be Tougher Than It Looks

AT&T’s WarnerMedia Accuses DOJ with ‘Collaborating’ With Dish in HBO Dispute

Howard Lindzon: Apple and The Meta Game

Jeff Miller: Boost Your AT&T Dividend Yield

Roger Nusbaum: IRA & 401k Contribution Limits Going Up In 2019!

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