Morning News: September 27, 2018
Posted by Eddy Elfenbein on September 27th, 2018 at 7:14 am

Why India Will Struggle to Join Iran’s Sanctions Busters

Italy Budget Uncertainty Returns to Haunt Europe

For the Fed, Ignoring Trump Is Good Policy

Google Dodges Questions About China During Senate Privacy Hearing

Watchdogs Can’t Handle Wall Street’s Riskiest Loans

Jeff Bezos’s Space Startup to Supply Engines for Boeing-Lockheed Rocket Venture

Apple: Is Warren Buffett Right?

Ford, BP Call Out Costs of Trump Administration’s Trade Policies

The World’s Leading Electric-Car Visionary Isn’t Elon Musk

McDonald’s President Reveals How the Chain is Managing a Potential Fast-Food Identity Crisis

The Hot Property That’s Next on Tech’s Agenda: Real Estate

Cheaper Battery Is Unveiled as a Step to a Carbon-Free Grid

Cullen Roche: 2 Reasons the Surging Deficit Worries Me

Michael Batnick: Animal Spirits: Looming Disaster

Howard Lindzon: Make Me Laugh and Smile and Facebook is The New Tobacco

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The Fed Raises Rates
Posted by Eddy Elfenbein on September 26th, 2018 at 2:04 pm

Once again, the Federal Reserve raises interest rates. Here’s the policy statement:

Information received since the Federal Open Market Committee met in August indicates that the labor market has continued to strengthen and that economic activity has been rising at a strong rate. Job gains have been strong, on average, in recent months, and the unemployment rate has stayed low. Household spending and business fixed investment have grown strongly. On a 12-month basis, both overall inflation and inflation for items other than food and energy remain near 2 percent. Indicators of longer-term inflation expectations are little changed, on balance.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that further gradual increases in the target range for the federal funds rate will be consistent with sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective over the medium term. Risks to the economic outlook appear roughly balanced.

In view of realized and expected labor market conditions and inflation, the Committee decided to raise the target range for the federal funds rate to 2 to 2-1/4 percent.

In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its maximum employment objective and its symmetric 2 percent inflation objective. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.

Voting for the FOMC monetary policy action were: Jerome H. Powell, Chairman; John C. Williams, Vice Chairman; Thomas I. Barkin; Raphael W. Bostic; Lael Brainard; Richard H. Clarida; Esther L. George; Loretta J. Mester; and Randal K. Quarles.

Here are the Fed’s updated economic projections.

Morning News: September 26, 2018
Posted by Eddy Elfenbein on September 26th, 2018 at 7:16 am

In a U.S. Manufacturing Hub, No Illusions About Tariffs and Jobs

Nafta’s Fate Hangs on a Four-Letter Word: Milk

Fed Dots to Harden Views for December Move: Decision-Day Guide

Trump Has a Weapon to Lower Oil Prices and It’s Not His Twitter

As Debt Rises, the U.S. Government Will Soon Spend More on Interest Than on the Military

One Reason for Slow Wage Growth? More Benefits

The Man Behind a $1 Trillion Wealth Fund Braces for Trade Rupture

Instagram Founders’ Exit Means No One to Challenge Zuckerberg

The Continental Shock of the Kors-Versace Deal

Daimler Names R&D Head as Next CEO, Zetsche to Become Chairman

Nike Buzz Created Tough Expectations

Hold the Donuts, Says Newly Named Dunkin

Nick Maggiulli: Why You Don’t Know the Price Until You Sell

Ben Carlson: Undervalued Financial Advice

Joshua Brown: Make No Mistake

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FactSet Earned $2.20 per Share
Posted by Eddy Elfenbein on September 25th, 2018 at 8:10 am

FactSet‘s (FDS) earnings are out, and the company earned $2.20 per share for their fiscal fourth quarter. That was one penny below expectations.

Let’s dig into the numbers a little bit because they’re not so bad. For the quarter, organic revenue rose 5.3% to $347.1 million. Annual Subscription Value (ASV), which is a key stat for FDS, increased to $1.39 billion. Organic ASV was up 5.7%. FDS noted that the increase for Q4 was $38.6 million, which is the highest in the company’s history. Adjusted operating margin, another key stat, inched up to 31.3% compared with 31.2% last year.

“We are proud to have reached many milestones in fiscal 2018. We celebrated 40 years as a company with 38 years of consecutive revenue growth and 22 years of consecutive adjusted EPS growth. This quarter we had the highest reported quarterly ASV in our history. We enter fiscal 2019 with strong momentum and an expanding suite of innovative workflow solutions to drive our growth plans,” said Phil Snow, FactSet CEO.

For Q4, FactSet’s effective tax rate was 18.0% compared with 25.3% a year ago. That’s largely due to the tax cuts. Their client count now stands at 5,142. That’s an increase of 167 in the past three months. User count increased by 2,391 to 91,897. Annual client retention is greater than 95% of ASV. As a percentage of clients, annual retention is 91%. Net cash provided by operating activities was $106.3 million compared with $100.2 million a year ago. Quarterly free cash flow rose 2.1% to $91.2 million.

For the entire year, FactSet’s organic revenues rose 5.6% to $1.35 billion while ASV rose 5.7% to $1.39 billion. Earnings increased 16.7% to $8.53 per share. Previously, the company said their earnings range was $8.37 to $8.62 per share, so things seem to be working out according to plan.

Annual client count increased by 8.4% or 398 during the year, while users grew by 3.4% or 3,051 from the prior year. Free cash flow increased 24.1% to $352.1 million.

Now let’s look at some estimates for fiscal 2019 (ending next August). The company expects earnings to range between $9.45 and $9.65 per share. That’s not a bad increase over this year. Wall Street had been expecting $9.61 per share.

FactSet sees organic ASV rising by $75 million to $90 million in 2019, and they see operating margins between 31.5% and 32.5%.

Update: FDS dropped sharply today. At one point, it was down 6.2% on the day. The shares recovered some and closed down 1.90%.

Morning News: September 25, 2018
Posted by Eddy Elfenbein on September 25th, 2018 at 6:57 am

Jamie Dimon Says It Will Take 25 Years for Bailouts to Be Forgiven

Future of Last U.S. Nuclear Plant Remains Uncertain Amid Talks

Despite Big Merger, Investors Still Cautious on Gold Mining Companies

The Future of 5G Mobile Data Could Hinge on a Battle Over Utility Pole Fees

Instagram’s Co-Founders to Step Down From Company

Comcast Knows What It Is. Investors Aren’t So Sure.

Sears CEO Proposes Plan to Avoid Bankruptcy, as Options and Cash Run Low

Fish-Oil Heart Medicine Is Rarest of Drug Breakthroughs

Starbucks Plans ‘Significant Changes’ to Company’s Structure

Walmart Requires Lettuce, Spinach Suppliers to Join Blockchain

Why Tilray’s Plunge Continued Today

Tokyo Whale Sells $230 Million of Bitcoin in Mt. Gox Wind-Down

Michael Batnick: The Next Generation

Howard Lindzon: Momentum Monday…The Calm Before The Calm?

Jeff Carter: You Always Will Have a Job if You Can Sell

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The Silent Bear Market
Posted by Eddy Elfenbein on September 24th, 2018 at 10:59 am

While the S&P 500 continues to be near all-time record highs, there’s a group of stocks, many related to trade, that are languishing well below their highs.

The Wall Street Journal notes that stocks like Harley-Davidson, Whirlpool, Stanley Black & Decker and Caterpillar haven’t done much of anything. The list also includes consumer staples like General Mills and our own, J.M. Smucker. Apple and Amazon make up 30% of the S&P 500’s gain so far this year.

Investors have ranked a trade war as the top tail risk to the markets for four consecutive months, Bank of America Merrill Lynch said in its September survey of global fund managers. Fears that tighter trade policies could crimp growth also have hit fund managers’ global outlooks, with 24% of investors expecting global growth to slow in the next year, up from 7% in August.

“There’s a number of money managers who’ve been hesitant to be involved with the [companies] that are going to be potentially affected by the tariffs, whether they’ll be able to export fewer goods or be buying less from China,” said Mark Grant, managing director and chief global strategist at B. Riley FBR Inc.

Sentiment towards tech may be changing. September could be the worst month for tech stocks since March. In the modern economy, it’s hard to draw a bright line between trade stocks and non-trade stocks. To a certain extent, they’re all trade stocks.

Morning News: September 24, 2018
Posted by Eddy Elfenbein on September 24th, 2018 at 7:04 am

App-Only Banks Rise in Europe and Aim at Traditional Lenders

America’s Libor Alternative Is Gaining Traction on Wall Street

Home Modems, Routers Hit by U.S. China Tariffs as ‘Smart’ Tech Goods Escape

JPMorgan Is Strategizing in Case of ‘a Major Miscalculation From Sanctions’ by Trump

Congress May Force Airlines to Install Bigger Seats, Ban Involuntary Bumping

In Beating Disney for Sky, Comcast Remains in the Game

Barrick Gold, Randgold in Advanced Talks on Merger

Singapore Imposes Fines, Restrictions Over Uber-Grab Deal

Google CEO: ‘We Do Not Bias Our Products to Favor Any Political Agenda’

Dell to Interview Banks for IPO in Lieu of Tracking-Stock Acquisition

Michael Kors Is Close to Buying Versace for $2 Billion

Harley Is Winning in Europe—Without a Trade War

Ben Carlson: The New Gilded Age?

Howard Lindzon: BTFD China? and Congrats Microsoft

Jeff Carter: Democratizing Food

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CWS Market Review – September 21, 2018
Posted by Eddy Elfenbein on September 21st, 2018 at 7:08 am

“Investing is the intersection of economics and psychology.” – Seth Klarman

On Thursday, the S&P 500 closed at 2,930.75, another record high. In the last 31 months, the index is up over 60%. But here’s an interesting fact about this rally. Despite steadily rising share prices, the bull market hasn’t had much impact on public opinion. My friend Gary Alexander recently noted:

A survey by Betterment Research from July 31 to August 6, 2018 polled 2,000 Americans over age 18 and found that 48% believed that stocks had been flat (had gained nothing) over the past 10 years. Another 18% believed stocks had declined. The truth? The S&P and the Dow are both up over 120% from July 31, 2008 to July 31, 2018, and the Nasdaq is up 230%.

That’s amazing. How can so many people be so wrong? I honestly don’t know, but my hunch is that the public is still turned off by Wall Street. I can certainly understand why. The financial crisis was bitter and painful. I also think the media shares in the blame. Unfortunately, fear and alarmism sell.

As disciplined investors with a long-term focus, we should always maintain a healthy skepticism of the market, but that can’t lead us to ignore basic facts: this is a very good time to be a patient investor. The economy is improving. Jobless claims just fell to another 49-year low, and our world-famous Buy List is up over 10% YTD. Our strategy is working.

In this week’s CWS Market Review, I want to help you sort out this mess and give you a plan for the rest of the year. First, we’ll focus on next week’s Fed meeting. The central bank will almost certainly raise interest rates. I’ll tell you what to expect and what it all means. I’ll also preview next week’s earnings report from FactSet. FDS is a 21% winner for us this year. Plus, I’ll update you on Wabtec’s dramatic week. But first, let’s see what Jay Powell and his friends at the Fed have in store for us.

What to Expect at Next Week’s Fed Meeting

The Federal Reserve meets again next week, on Tuesday and Wednesday, and this will be a biggie. This will be one of the Fed’s two-meetings, which means it will be followed by a press conference from Jay Powell, the Fed Chair. The Fed participants will also update their economic projections.

The Fed is widely expected to raise interest rates. This will be their eighth rate hike in the last three years. It will bring the Fed funds target range up to 2% – 2.25%. There are a few important points here. The first is that this rate hike will bring the real Fed funds rate (meaning after inflation) to 0%. Real Fed funds have been consistently negative since the economy went kablooey ten years ago. In fact, real Fed funds have been negative almost non-stop since 9/11 except for a three-year period before the financial crisis.

Here’s the Fed funds rate (in red) along with the core inflation rate (in blue):

The equation is very simple: when real short-term rates are low, especially negative, it’s very good news for stocks. And they have been. That won’t magically change next week, but the free-money window is beginning to close. We can also see the effect by looking at the yield curve. The spread between the two- and ten-year Treasury yields is now down to 26 basis points. In other words, about one more Fed rate hike. This week, the two-year Treasury yield got as high as 2.81%. It hasn’t been that high in more than a decade. For some context, at one point in 2011, the two-year was yielding just 0.16%. The world has come back to normal.

I want to be careful in how I word this. A negative yield curve is on balance bad for stocks and the economy, but it’s not a tripwire. Instead, it’s a warning sign. For example, the 2/10 spread went negative in late 2005. The stock market and economy chugged along for two more years. They key with a flat yield curve is to be more cautious but not run away at the first signs of trouble.

The other important aspect of this meeting will be the Fed’s economic projections. Let me preface by saying that the Fed’s predictions are notoriously bad. I mean, even for economists. Still, it’s important to know what the Fed is thinking.

In the last projections, a narrow majority at the Fed saw the need for two more rate hikes this year (meaning one in September and another in December). Frankly, I’ve been a doubter on a December hike, but it looks like I’ve been outvoted. The futures market places the odds at 90% for a December hike.

But what about 2019? Well, here’s where it gets a little tricky. The Fed sees three more hikes next year, but the futures market isn’t so sure, and I share their skepticism. The futures see a March hike, and maaaaybe another one before the end of the year. At next week’s meeting, it’s very possible that the Fed might pare back its forecasts for 2019. The distribution of the Fed’s projections are fairly dispersed, so it wouldn’t take a lot to bring the median vote down to two hikes for 2019. If that happens, it would be a good signal for the market.

The reason this is important is that an overly-vigilant Fed has historically been a big threat to bull markets. The Fed also always overdoes it. Once the yield curve goes negative, then we want to start paying close attention to knock-on effects. At the top of the list is the housing market. To reiterate, we’re in a good spot right now, but mistakes from the Fed could lead to unpleasantness in 2019. Now let’s take a look at our one Buy List earnings report for next week.

Preview of FactSet’s Earnings Report

FactSet (FDS) has been a nice 21% winner for us this year (see below). Because the company follows an off-cycle reporting schedule (its fiscal year ends in August), it’s due to report its fiscal Q4 earnings on Tuesday, September 25.

I’m expecting more good news from FactSet. In June, they reported fiscal Q3 earnings of $2.18 per share, which beat Wall Street’s estimate by five cents per share. Q3 was a solid quarter for them. Revenues increased 8.9% to $339.9 million compared.

Thanks to those good numbers, FactSet also bumped up its full-year earnings forecast. The old range was $8.35 to $8.55 per share. The new range is $8.37 to $8.62 per share.

FactSet’s CEO said, “We are making progress integrating and cross selling our acquisitions resulting in important wins this quarter, particularly within Analytics. We continue to innovate with the launch of the Open:FactSet marketplace and enhancing our risk offering. We believe we have a solid pipeline for the fourth quarter and expect to finish fiscal 2018 in our guidance range.”

With FactSet, the key stat to watch is Annual Subscription Value or ASV. For Q3, ASV rose 5.3% to $1.36 billion. At the end of the quarter, FactSet had 4,975 clients. That’s an increase of 80 clients. User count rose by 860 to 89,506.

One weak spot is operating margin. For Q3, their operating margin fell to 31.0% compared with 31.9% a year ago. The company blamed the fall on restructuring actions and certain one-time administrative expenses.

The CEO said, “We made good progress on our annual and medium term goals this quarter. The restructuring actions we initiated this quarter help us to optimize costs and benefit margins in the future. With our balanced capital allocation framework including our robust share buyback program and an increase in dividends, we continued to return value to shareholders.”

Let’s run some math. For the first nine months of the fiscal year, FDS has earned $6.34 per share. The current outlook implies Q4 earnings of $2.03 to $2.28 per share. Wall Street had been expecting $2.19 per share, but they’ve now raised their expectations to $2.21 per share. I’m expecting something closer to $2.25 per share. I’ll be curious to hear what they have to say for Q1 guidance. FactSet remains a very solid stock.

Update on Wabtec

Shares of Wabtec (WAB) got slammed for a 12.4% loss last Friday after an analyst at JP Morgan questioned whether the math adds up on WAB’s merger deal with GE.

The company played it smart. They shot back with a press release on Friday stating that the merger deal “continues to make progress,” and that they expect it to be complete by early 2019.

Then on Monday, WAB amended their proxy which noted that they expect to see a “minor” (their word) $63 million adjustment in revenue and EBIT for next year. Bear in mind, WAB expects free cash flow of $6 billion from 2019 to 2022. They also said that adjustment will have “no material effect in future years.” They stood by their other financial targets for the deal. The stock rallied 7% on Monday.

Barron’s quoted two analysts who are optimistic on Wabtec. Both of them noted that the freight-rail business has been above expectations. I’m still a fan of this company. Wabtec remains a buy up to $111 per share.

One final note. Sherwin-Williams (SHW) keeps busting through our Buy Below prices. At the start of July, our Buy Below on SHW was $400. The stock ran straight through that, so I raised it to $414. Soon it crashed through that. I then raised our Buy Below to $460 per share. I thought that would give us some breathing room. Not quite. Here we are a few weeks later, and SHW is at $478. It’s not a bad problem to have. SHW is up $100 in four months. This week, I’m lifting my Buy Below on Sherwin-Williams to $498 per share.

That’s all for now. The third quarter comes to a close next week. The big story will be the Fed meeting. Look for the latest policy statement on Wednesday afternoon. We’ll also get updated economic projections. Then on Thursday, we’ll get the latest report on durable goods. Also on Thursday, the government will update the Q2 GDP report. The initial report showed growth of 4.1% which was later revised to 4.2%. 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

P.S. Join me for next week’s “Alpha Call.” On Wednesday, September 26 at 4 pm ET, I’ll be talking markets with market veteran Louie Navellier. Follow this link to register.

Morning News: September 21, 2018
Posted by Eddy Elfenbein on September 21st, 2018 at 7:05 am

Bullish Mood Buoys Stocks; Oil, Commodities Rally

Leveraged Loans Are Flying Off the Shelves

The Auto Industry’s VHS-or-Betamax Moment

‘Angriest Man’ Creates Tariff Headache for Made-in-USA Bicycles

Caterpillar Leans on Old Playbook to Cope with Trump Tariffs

New Pressure on Google and YouTube Over Children’s Data

Medtronic to Buy Mazor Robotics for $1.6 Billion

iPhone XS Buyers Undeterred by Eye-Watering Prices, Few Upgrades

Farfetch Tops Price Range in IPO in Boon to Luxury Market

Micron Technology Beats Earnings Targets, But Disappoints On Outlook

Tesla Loses Supply Management Chief as Exodus Worsens

Wells Fargo to Cut Headcount by 5-10% in Next Three Years

Peter Lynch’s Blossoms in the Desert

Ben Carlson: Knowledge Vs. Skill

Blue Harbinger: Do You Trade Extreme Market Moves?

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Morning News: September 20, 2018
Posted by Eddy Elfenbein on September 20th, 2018 at 7:14 am

Treasury Yields Take Flight, Setting Up Big Shorts for Rewards

The Fight to Protect the Fed From Trump’s Rate-Hike Barbs

Dollar Traders See the Fed’s Next Rate Hike as a Big Sell Signal

Jack Ma: Trade War Has Killed My Pledge to Create 1 Million US Jobs

It’s Not a Trade War, It’s a Trade Skirmish, JPMorgan’s Jamie Dimon Says

Amazon Dominates as a Merchant and Platform. Europe Sees Reason to Worry.

Why Jeff Bezos Should Push For Nobody to Get as Rich as Jeff Bezos

Comcast, Fox to Settle $35 Billion Takeover Battle for Sky in Weekend Auction

Facebook and Twitter Must Comply with EU Consumer Rules or Face Sanctions

Aston Martin Speeds Ahead with Up to $6.7 Billion October IPO

Nearly Half of Cellphone Calls Will Be Scams by 2019, Report Says

Global LNG Surges: Buy The Stock Of The Decade

Ben Carlson: Borrowing From the Future

Howard Lindzon: The Anxiety Economy… and The Tilray Top?

Roger Nusbaum: Tilray Goes Cra Cra

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