Morning News: August 31, 2018
Posted by Eddy Elfenbein on August 31st, 2018 at 7:51 am

Lira Gets a Helping Hand as Turkey Raises Tax on Dollar Deposits

What’s a Peso Worth? All Bets Are Off as Argentina Pain Spreads

Too Many Chinese Children Need Glasses. Beijing Blames Video Games.

Trump Makes Clear EU Won’t Escape His Ire Over Trade for Long

Coke Makes $5.1 Billion Bet on Coffee Market With Costa Purchase

Apple, Oracle Dump Bonds and Create $300 Billion Hole in Market

Stryker Agrees to Buy Spinal-Device Maker K2M

Walmart Wants to Replace Toys ‘R’ Us

Dollar Tree Is No Dollar General

Elon, What Were You Thinking?

Modi’s Cash Crackdown Failed, Indian Bank Data Shows

Why Helios and Matheson Stock’s Latest 22% Surge Is Truly Ridiculous

Cullen Roche: Why Political Extremism Will Get Worse

Howard Lindzon: Men Who Wear Hats and LULU

Blue Harbinger: Stock Exchange: You Can Make It As A Trader, If You Do It Right

Be sure to follow me on Twitter.

Personal Income and Spending
Posted by Eddy Elfenbein on August 30th, 2018 at 12:25 pm

We don’t have much in the way of data for Q3, but we got a nice hint today with the personal income and spending data for July. This data usually comes right after the GDP report.

The BEA said that personal income rose by 0.3% last month while personal spending rose by 0.4%. Those are pretty good numbers, but bear in mind that it only covers the first third of the third quarter.

Here’s the recent history:

The New York Fed’s Nowcast sees Q3 GDP growth coming in at 1.96%. The Atlanta Fed is at 4.1%.

Buyout Thursday
Posted by Eddy Elfenbein on August 30th, 2018 at 10:47 am

Apparently, the Thursday before Labor Day is a popular time to make strategic acquisitions. Two of our Buy List stocks announced deals today.

First up, Moody’s (MCO) said they’re buying Reis (REIS), a firm that deals in real estate data. It’s an all-cash deal that values Reis at $278 million or $23 per share. The stock closed yesterday at $17.40 per share.

The transaction will be funded through a combination of cash on hand and commercial paper. Moody’s expects the acquisition of Reis to be accretive to earnings per share on a GAAP basis in 2020. On an adjusted EPS basis, which excludes purchase price amortization, the transaction will be accretive in 2019. Moody’s continues to expect share repurchases for 2018 to be approximately $200 million, subject to available cash, market conditions and other capital allocation decisions.

The deal is expected to close in Q4.

Today’s other deal is that Stryker (SYK) is buying K2M Group Holdings (KTWO) at $27.50 per share. That works out to $1.2 billion. KTWO closed yesterday at $21.82 per share.

Stryker said K2M Chief Executive Eric Major will become head of the division upon the completion of the deal.

Stryker said the deal wouldn’t affect earnings this year. It expects to report adjusted earnings of $7.22 to $7.27 this year.

Earlier this year, Stryker completed its acquisition of Entellus Medical Inc., a manufacturer of devices for various ear, nose and throat diseases.

K2M, which was founded in 2004, has become a prominent player in the $10 billion spinal market, Stryker said, through its development of minimally invasive and complex spinal support systems.

Morning News: August 30, 2018
Posted by Eddy Elfenbein on August 30th, 2018 at 6:29 am

Macron and Merkel Are Signaling They’ve Finally Had Enough of Trump

The Biggest Legacy of the Financial Crisis Is the Trump Presidency

Trump’s Tariffs on Canadian Newsprint Are Overturned

Bernie vs. Bezos: Amazon and Sanders Are Duking it Out Over Warehouse Working Conditions

Roku Is the Latest Victim of the “Amazon Effect”

Ford Teeters Toward Junk With Moody’s Warning of Restructuring Risks

Coca-Cola’s Got Moxie, the Quirky New England Soda

Toyota Joins Uber On Its Tortuous Journey to Robocars

The Long, Monstrous Reign of the Red Delicious Apple is Ending

Pressures on Didi Intensify After Latest Passenger Killing

`Overtourism’ Worries Europe. How Much Did Technology Help Us Get There?

Papa John’s Independent Board Members Dispute Founder’s Claims

Joshua Brown: Defeating Short-Termism with More Data, Not Less

Michael Batnick: Animal Spirits: When Hitler Took Cocaine

Jeff Carter: California Tells Publicly Traded Companies to Submit or Leave

Be sure to follow me on Twitter.

Q2 GDP Revised to 4.2%
Posted by Eddy Elfenbein on August 29th, 2018 at 10:32 am

This morning, the Feds revised upward their estimate for Q2 GDP growth. They now say the economy grew in real annualized terms of 4.2% during the second three months of the year. The initial report, released a month ago, said the economy had grown by 4.1%. The report will be revised again in late September.

From the WSJ:

The second-quarter growth rate’s revision partly reflected stronger business investment than earlier forecast and a slight downward revision to consumer spending. The 4.2% rate still marked the strongest pace of growth in nearly four years.

That followed a growth rate of 2.2% in the first quarter. Output expanded 2.9% in the second quarter compared with the same quarter a year earlier.

Growth in U.S. corporate profits moderated in the second quarter compared with the first, according to the government’s initial broad estimate of profits at U.S. companies in the second quarter.

After-tax corporate profits with inventory valuation and capital consumption adjustments, a measure of profits from production that quarter, rose 2.4% in the second quarter from the prior quarter after rising 8.2% in the first quarter. After-tax profits without inventory valuation and capital consumption adjustments rose a seasonally adjusted 3.7% from the prior quarter after rising 8.5% in the first quarter.

Here’s a look at the year-over-year change in nominal GDP:

Morning News: August 29, 2018
Posted by Eddy Elfenbein on August 29th, 2018 at 4:49 am

U.S. to Stress Friday Nafta Deadline as Canada Joins Talks

The Treasury Yield Curve Is Finally Going Mainstream

U.S. Consumer Confidence Surged in August to Near 18-Year High

U.S. Bank Regulator Moves to Modify Lending Rules for Poorer Communities

Amazon’s Whole Foods Strategy Is Working

Best Buy Cautions on Profit Growth, Even as Sales Swing Higher

Yum China Rejects Private Buyout Offer at $46 a Share

Yahoo, Bucking Industry, Scans Emails for Data to Sell Advertisers

To Boost Growth, Buffett Now Looks To The Start-Up Sector

Elon Musk’s Public Reckoning

Ermenegildo Zegna to Buy Thom Browne in a Bid for Younger Customers

Aston Martin Makes Long-Awaited Move for IPO in London

Nick Maggiulli: What Will Always Be True

Lawrence Hamtil: The Inflation Advantage of Equal-Weight

Ben Carlson: Why Doesn’t The Stock Market Care About the News?

Be sure to follow me on Twitter.

Morning News: August 28, 2018
Posted by Eddy Elfenbein on August 28th, 2018 at 5:03 am

Japan Auto Makers, Facing Uncertain Road in U.S., Look to China

State Of The Economy Part 5: Fed Threatens To Hike U.S. Into Recession

Trump Dents Hopes for a China Deal After Agreement With Mexico

The Trump Tax Cuts Were Supposed to Depress Housing Prices. They Haven’t.

Toyota Investing $500 Million in Uber in Driverless-Car Pact

Nestle to Take on 500 Starbucks Employees in Coffee Alliance

Netflix Hires Facebook Exec to Lead Communications Efforts

As Sears Withers, Its Former Stores Fuel a New Fortune

Tesla Convinces Judge to Dismiss Model 3 Production Lawsuit

Report on Volkswagen’s Changes Since Emissions Scandal Cites Lack of Transparency

FCC Clears Ajit Pai of Wrongdoing in Sinclair’s Failed Takeover of Local News

Transamerica’s Entities to Pay $97.6 Million to Misled Retail Investors

Howard Lindzon: Nirvana – Momentum Monday

Roger Nusbaum: An Argument Against Living Below Your Means?

Joshua Brown: Just Asking…

Be sure to follow me on Twitter.

Ross Stores Bounces Back
Posted by Eddy Elfenbein on August 27th, 2018 at 10:55 am

On Thursday, Ross Stores (ROST) reported what I thought were decent earnings. The guidance was low, but that’s what Ross always does. The numbers shouldn’t have surprised anyone. Yet the shares dropped sharply in the after-hours market. The lowest I saw was that Ross was off 7% after the bell.

This was a little frustrating for me since I always send the newsletter out on Fridays before the opening so I couldn’t see how the market reacted. Ross had a chaotic open on Friday. It surged and plunged. Later in the day, Ross calmed down and the stock actually closed the day higher by a few pennies per share.

This is a good lesson on why it’s important to not get too stressed about short-term moves in the stock market. It’s also why I’m not a fan of stops. Normal market moves can throw you out of a good stock.

Morning News: August 27, 2018
Posted by Eddy Elfenbein on August 27th, 2018 at 7:19 am

The Time Is Ripe to Buy China Sovereign Debt, Analysts Say

EU Looking to Sidestep U.S. Sanctions With Payments System Plan

Turkish Lira Tumbles as Volatility Returns After Holiday Week

Mexico, U.S. Closing In On NAFTA Deal, Talks to Resume Monday

‘Economy Is Strong,’ Fed Chairman Says, Urging a Policy of Risk Management

Venezuela’s PDVSA Files Appeal Against Crystallex Court Ruling

Tesla Slides After Musk Scraps ‘Take Private’ Drive Following Investor Revolt

Why Elon Musk Reversed Course on Taking Tesla Private

Amazon’s Whole Foods Is Starting to Steal Trader Joe’s Shoppers

Did Juul Lure Teenagers and Get ‘Customers for Life’?

Sinopec Is Planning the Wrong Spinoff

Are Superstar Firms and Amazon Effects Reshaping the Economy?

Jeff Miller: Weighing the Week Ahead: Should Investors Worry about the Yield Curve?

Ben Carlson: 10 Things You May Not Know About the Great Depression

Michael Batnick: The Bad Actors

Be sure to follow me on Twitter.

CWS Market Review – August 24, 2018
Posted by Eddy Elfenbein on August 24th, 2018 at 7:08 am

“It amazes me how people are often more willing to act based on little or no data than to use data that is a challenge to assemble.” – Robert J. Shiller

On Tuesday, it finally happened. Shortly before 1 p.m. ET on August 21, the S&P 500 went above 2,872.87 to reach its highest level ever. True, it didn’t get there by much; the index wound up topping out at 2,873.23 a few minutes later. But still, it was an all-time record, and it took nearly seven months of trying. This now counts as the longest bull market in history (although some folks may quibble on definitions). Basically, every two dollars invested in the market nine and a half years ago is ten dollars today.

In retrospect, this was a pretty tame correction we had earlier this year. From top to bottom, the S&P 500 lost a little more than 10% which is the traditional definition of a correction. However, most of that loss came over two trading days. By the time folks on Wall Street were debating if we were truly in a correction, it was already mostly over. There’s a lesson for investors in that.

In this week’s CWS Market Review, I’ll talk about President Trump’s recent stock market comments. Plus, I’ll cover our three Buy List earnings reports from this week. The reports were fine, but the stocks did not respond well. That’s frustrating, but it’s not uncommon on Wall Street. As we know well, the market gods are capricious. But first, will impeachment make us all poor?

Don’t Expect Any President to Sink or Save the Market

I prefer to steer clear of politics around here, but about once a day, an investor will ask me, “So…when will Trump sink the market?” At the other end, President Trump offered his take that impeachment would wreck the market. The president added, ominously, that, “everybody would be very poor.”

Eh, I’m not so sure about that. It’s true that the stock market got shellacked during Watergate, but it did well after President Clinton’s difficulties. (Sorry, I don’t have data on Andrew Johnson.) To be fair to President Nixon, there were a lot of other things going on during Watergate. The economy was tanking, inflation was soaring, and the Middle East was in flames. The 1973-74 market bust-up was one of the worst on record.

In reality, I don’t think the occupant of the White House has a large influence on the financial markets. I realize that may sound heretical to some, but I stand by it. After the election in 2016, Paul Krugman wrote, “If the question is when markets will recover, a first-pass answer is never.” And he has a Nobel Prize! Politics and investing don’t mix well. In the short-run, sure—the president certainly matters. But in the long run, it’s all about sales, earnings and interest rates. Money stuff: that’s what counts.

After President Trump’s election in 2016, there was a definite Trump Bump, but it didn’t last long. You can also see the impact on certain sectors. Healthcare stocks got spooked during Hillary Clinton’s healthcare initiative in 1994. Gun stocks often jump after a shooting on fears (or hopes) that folks will rush to buy before a new anti-gun law is passed.

My take is that financial markets are probably more influential on policy makers than vice versa. In 1981, François Mitterrand shocked the world by getting elected president of France. He had a bold socialist program. Unfortunately for him, forex traders found out, and the franc got sautéed. The weak currency started to hurt the French economy. In other words, Mitterand’s brand of socialism was hurting workers, and within two years, he did an about-face (Tournant de la rigueur).

It’s odd how we act like politicians are players in a game and the market is the scoreboard. I sometimes wonder if it’s the other way around. I’ll reiterate my position that the U.S. economy is mostly good right now. Not perfect, but good. On Thursday, jobless claims again came close to their lowest level since Altamont. Corporate earnings are pretty good. Inflation and interest rates are still low. In fact, the real Fed funds rate is still negative!

The growing Trade War is a concern. In fact, this week’s Fed minutes indicated that FOMC members discussed the issue at their last meeting. Even Hormel, a Buy List member, said that tariffs could hurt them this year. Still, trade probably isn’t large enough to sink the economy.

Truthfully, the most important sector to watch is housing. This is the tail that wags the dog. For the most part, housing looks pretty good. Mortgage delinquencies are running at a 12-year low. There could be some cracks showing in housing’s facade. For example, Redfin’s stock got pummeled earlier this month. I don’t want to overstate the case. There could be big problems soon, but for now, there’s no reason to believe any president or any party will wreck the stock market.

The key for investors is to focus on good stocks with good earnings. Don’t overthink it. Now let’s turn to this week’s Buy List earnings reports.

Three Buy List Earnings Reports this Week

We had three Buy List earnings reports this week. Unfortunately, the stocks did not respond well to what the companies had to say. Note that all these companies had quarters that ended in July.

Let’s start with JM Smucker (SJM). On Tuesday, the jelly people reported fiscal Q1 earnings of $1.78 per share. That was two cents better than estimates. However, that total included a charge of seven cents due to “a purchase accounting adjustment attributable to acquired Ainsworth inventory.”

Let me explain what’s going on with Smucker and some other big food companies. This is basically a fine company. At the moment, however, they’re caught by rising prices. The cost for a lot of the things they make is falling, and that means they have to pass on the lower prices to consumers. As a result, dollar sales are flat even though sales by volume are doing fine.

Smucker knows what the problem is, and they’re working to address it. That’s why they recently sold off Pillsbury and picked up Ainsworth. Of course, it will take a few quarters to see the results of this strategy.

For Q1, the company had this to say:

“Our strong first-quarter earnings reflect the execution of our strategy, aligning our portfolio for growth in pet food, coffee, and snacking,” said Mark Smucker, Chief Executive Officer. “During the first quarter, we completed the Ainsworth acquisition, which drove much of our year-over-year sales growth, and we are making significant progress toward integrating the business. We also announced a planned divestiture of our U.S. baking business, which is expected to close at the end of this month. In addition, we had strong first quarter performance for key growth brands, including Dunkin’ Donuts®, Smucker’s® Uncrustables®, Nature’s Recipe® and Café Bustelo®, while continuing to execute our cost-reduction programs to enhance margins and provide fuel for investments in future growth.”

Smucker updated its financial guidance. Importantly, they didn’t alter their full-year EPS range, which is still $8.40 to $8.65 per share. They did pare back their revenue estimate from $8.3 billion to $8.0 billion. Smucker also lowered their free-cash range from between $800 million and $850 million to between $770 million and $820 million. The updated guidance reflects “the anticipated impact from the pending divestiture of its U.S. baking business.”

This is from the Wall Street Journal:

Divesting the baking line, which makes Pillsbury cake mixes, and acquiring pet-snack maker Ainsworth were appropriate moves to adjust Smucker’s portfolio. Ainsworth sales were up 28% from a year earlier in the July quarter, and the company said it expects this growth to be sustained for the full year.

But what Smucker really needs, like fellow struggling food giant Campbell, is a convincing plan to turn around its core brands. With respect to Folgers, Chief Executive Mark Smucker said the company is working on “longer-term initiatives to reinvigorate coffee rituals for this iconic brand.” It was unclear what he meant.

I know what he meant. Smucker will continue to jettison older businesses while concentrating on niche areas. That’s the smart play. This is a company that generates a lot of cash and can easily put those dollars to use. On Tuesday, shares of SJM fell 6.62%, and they continued to lose ground on Wednesday and Thursday. SJM is now going for just 12 to 12.4 times this year’s guidance range, plus the dividend yields 3.25%. Smucker is worth holding onto.

On Thursday morning, Hormel Foods (HRL) said they made 39 cents per share for their fiscal third quarter which was up 15% from a year ago. The results matched Wall Street’s expectations. The company reaffirmed its full-year guidance of $1.81 to $1.95 per share. Net sales were up 7%, while organic sales were flat. Many of the same issues impacting Smucker are at play with Hormel. The company said that tariffs could ping them as much as six cents per share in earnings.

Overall, this was an OK earnings report, but it was nothing great. The downside is that Hormel trimmed its full-year sales estimate to a range of $9.4 billion to $9.6 billion.

The CEO said:

“We reported record sales and earnings for the quarter and remain on track to deliver our full-year-earnings guidance range amid volatility due to tariffs and broader industry dynamics,” said Jim Snee, chairman of the board, president, and chief executive officer. “We continue to execute on our strategic initiatives while investing in growth for the future.”

“Grocery Products and International delivered solid results this quarter,” Snee said. “Refrigerated Foods’ branded value-added strategy was able to offset a dramatic decline in commodity profits. We also saw a strong increase in value-added sales at Jennie-O Turkey Store.”

“We increased our advertising investment this quarter and those investments are paying off with growth from brands such as Skippy®, Natural Choice®, Jennie-O®, Applegate®, Wholly Guacamole® and Herdez®,” Snee said. “I’m also pleased to report that our recent strategic acquisitions of Columbus Craft Meats, Fontanini and Ceratti are on track with expectations.”

The story is the same—it all comes down to prices. There’s a glut of beef, chicken and pork. That’s holding down prices, and that cuts into Hormel’s business. This year, lean hog prices are down 26%. As a result, Hormel is forced to cut prices just to keep up.

Just like Smucker, Hormel has worked to alter its business. That’s why they picked up businesses like Applegate Farms. During Thursday’s trading, Hormel lost about 3%. I’m not worried about Hormel Foods. In fact, I’m raising our Buy Below on Hormel to $40 per share.

After the bell on Thursday, Ross Stores (ROST) reported fiscal Q2 earnings of $1.04 per share. That’s up from 82 cents per share last year. Sales were up 9%, and same-store sales were up 5%. Ross gave us a range for Q2 of 95 to 99 cents per share. I know that was too low. In last week’s issue, I said I expected something like $1.03 per share, and I was a penny off.

Barbara Rentler, Chief Executive Officer, commented, “We are pleased with the above-plan growth we delivered in both sales and earnings in the second quarter. Though better than expected, operating margin of 13.8% was down from last year as higher merchandise margin and leverage on occupancy and buying costs were more than offset by a combination of unfavorable timing of packaway-related expenses, higher freight costs, and this year’s wage investments.”

Ms. Rentler continued, “During the second quarter and first six months of fiscal 2018, we repurchased 3.2 million and 6.5 million shares of common stock, respectively, for an aggregate price of $273 million in the quarter and $529 million year-to-date. As planned, we expect to buy back a total of $1.075 billion in common stock during fiscal 2018.”

Ross gave some financial guidance for the second half of the fiscal year. For Q3 and Q4, the company is aiming for same-store sales growth of 1% to 2%. For Q3, Ross sees EPS between 84 and 88 cents. Wall Street had been expecting 88 cents per share. For Q4, Ross expects between $1.02 and $1.07 per share. That works out to full-year guidance of $4.01 to $4.10 per share. Wall Street had been expecting $4.08 per share.

Ross has bold plans for the future. The company now aims to open 3,000 stores which is up from the previous goal of 2,500. The after-hours market on Thursday showed Ross losing about 5%. That seems overdone to me, but it’s only erasing the last three weeks’ worth of gains. Ross continues to be a solid outfit. For now, I’m keeping our Buy Below at $90 per share.

That’s all for now. There will be no newsletter next week. I’m taking a little break. Remember that the stock market will be closed on Monday, September 3 in honor of Labor Day. There’s not a lot scheduled for next week ahead of the holiday. On Wednesday, we’ll see the first revision to the Q2 GDP report. The initial report was 4.1%, which is quite good. 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