Morning News: August 13, 2018
Posted by Eddy Elfenbein on August 13th, 2018 at 6:45 am

Indian Rupee Hits Record Low, Central Bank Intervention Seen

Turkey Takes First Steps to Bolster Banks Amid Lira’s Decline

China Seeks Influence in Europe One Business Deal at a Time

Trump Wields a Tariffs-and-Sanctions Hammer in Risky Strategy

Google Woos Partners for Potential China Expansion

Empty Shipyard and Suicides as ‘Hyundai Town’ Grapples with Grim Future

Bayer Drops After Monsanto Loses Roundup Cancer Trial

Saudi Fund in Talks to Invest in Tesla Buyout Deal

Tesla’s Slow Disclosure Raises Governance, Social Media Concerns

As Barnes & Noble Struggles to Find Footing, Founder Takes Heat

Trump’s War With Harley-Davidson Has Divided America’s Bikers

PepsiCo Investors Should Be Happy CEO Indra Nooyi Is Out

Ben Carlson: 8 Questions I’ve Been Pondering

Joshua Brown: QOTD: The Case for 4%

Jeff Miller: Weighing the Week Ahead: Don’t Get Framed!

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Inflation Still Contained
Posted by Eddy Elfenbein on August 10th, 2018 at 9:46 am

This morning’s CPI report showed that inflation rose by 0.17% in July. That’s still tame.

In the last year, the CPI is up 2.89%. That’s the most in more than six years, but most of that increase came more than six months ago.

Core inflation rose by 0.24% in July. In the last year, it was up 2.33%. That’s the highest year-over-year number in 10 years, but it’s still not far from the average.

CWS Market Review – August 10, 2018
Posted by Eddy Elfenbein on August 10th, 2018 at 7:08 am

“People calculate too much and think too little.” ― Charlie Munger

Earnings season has finally passed for us. It felt like the last few issues were just me reading off numbers to you: “So-and-so reported X cents, beat by Y and raised Z cents.” Despite all the math, earnings season is crucial for us, and it gives our strategy a moment to shine.

I’m happy to say that our Buy List has been doing very well lately. This week, we hit a new all-time high. We’re up 6.2% for the year, and we’ve already taken out our January peak, while the S&P 500 hasn’t quite done the same (though it’s getting very close). Going back to May 3, our Buy List is up 9.64% compared with 8.51% for the S&P 500.

Several of our stocks, like Ross Stores (ROST), Fiserv (FISV), Becton, Dickinson (BDX) and AFLAC (AFL), are at or near new 52-week highs. In this week’s issue, I want to change course and talk more about the economy and the general investing climate. The good news is that it looks very good for us. Let’s dig in and start with last week’s jobs report.

The Economy Is Good, Not Great

Last Friday, the government reported that the U.S. economy created 157,000 net new jobs for the month of June. That’s a decent figure, although it was below expectations. It means the jobs machine continues to plow on, past when many people thought it would peter out. The unemployment rate ticked down to 3.9%. The unemployment rate is lower now than it was for every single month from 1970 through 1999.

It’s true: the economy is doing well. Please understand that I mean that in a strict macroeconomic sense. Of course, lots of people are having a hard time. I don’t mean to imply that we’re on easy street. By a “strong economy,” I mean that in the aggregate, economic activity is expanding. I don’t have the final number on the Q2 earnings season, but the earnings beat rate was running over 80%, and the revenue beat rate was running at over 70%. That’s very good. Earnings were up over 20% compared with last year’s Q2.

We can see evidence in the government reports as well. The initial report on Q2 GDP showed an increase of 4.1%. That’s pretty good. Jobless claims continue to be near 50-year lows. The stock market is moving up, and the U.S. dollar is strong. What’s also interesting is that the breadth of the stock market is improving. It’s not just the FAANG stocks, but more and more smaller guys are joining the party.

It’s important that we keep an eye on interest rates. Last week, the Fed decided to leave rates alone. That was the right call, but they’ll almost certainly raise rates again in September. It won’t end there. The futures traders are betting that we’ll get another hike in December. Personally, I’m not so sure of that, but I’m open to being convinced. The recent remarks from Fed officials have stressed the need to move on rates before inflation starts to spark higher. The Fed always overshoots on rates. That’s not my opinion. It’s a well-established historical fact.

The Problem Is Wages

We should also remember that the Fed isn’t raising rates from normal to high. Instead, we’re going from very, very, very low to somewhat moderate. It’s just that we haven’t been in this range in a long time, so the change may feel larger than it is. Still, short-term interest rates are running below inflation. It’s been that way for 10 consecutive years.

The problem for the Fed is the troubling detail that appeared in last week’s jobs report, and that’s wages. Americans are seeing their pay growing, but after inflation, it hasn’t amounted to much. That’s frustrating to see. Of course, higher wages mean more shopping, and that means more profits. The improved earnings have actually lowered stock valuations over the last few months. (I wonder how many people realize that.)

This economy has been quite good for companies like Ross Stores (ROST) which focuses on bargain-sensitive consumers. The deep-discounter just made another 52-week high.

We’re also seeing renewed strength in some cyclical stocks. These are the sectors whose fortunes are mostly closely tied to the economic cycle: construction, railroads, steel, chemicals—stuff like that. On our Buy List, we’ve been getting big gains lately from our cyclicals. Later on, I’ll talk about the big rally in our wallboard company, Continental Building Products. Wabtec (WAB), our freight-services stock, is doing very well this year. Sherwin-Williams (SHW) started out poorly for us but has made an impressive turnaround.

As long as consumer spending and the housing market remain healthy, the economy will continue to chug along. A lot of people have asked me if the growing trade war will sink the economy. My answer is that it’s bad for the economy but probably not severe enough to trip things up. Among major economies, the U.S. is one of the least trade-intensive.

I would caution investors against being too heavily weighted towards technology stocks. We have some good ones on our Buy List. Check Point Software (CHKP), for example, has done well for us. It’s OK to have some tech stocks, but I don’t like the prices I’m seeing out there. Be careful not to be over-exposed.

I’d also urge investors not to forget dividends. We have lots of solid dividend-payers on our Buy List. Smucker (SJM), for example, now yields over 3%. Last month, the jelly folks raised their dividend by 9%. It was their 17th annual increase in a row.

AFLAC (AFL) has increased its dividend for 35 years in a row. Look for #36 in October. Going by Thursday’s close, the duck stock yields 2.22%. That’s equivalent to 567 points on the Dow, and you basically get that for just showing up.

It’s important not to chase stocks. Wait for good stocks to come to you. Make sure you’re well diversified, and pay attention to our Buy Below prices. Now here are some updates on our Buy List stocks.

Buy List Updates

In last week’s issue, I mentioned the excellent earnings reports from Continental Building Products (CBPX). However, the stock reported after the close on Thursday, and I wasn’t sure how the market would respond.

Well, now we know. The stock soared. CBPX gained more than 8% on Friday and then another 4.5% on Monday. It gained ground on Tuesday, Wednesday and Thursday as well. In the last week, the CBPX is up 18%. It’s now our second-biggest winner on the year (+32.5%), trailing only Wabtec (+36.9%). This week, I’m lifting my Buy Below on Continental Building Products to $40 per share.

In our last issue, I also discussed the good earnings report and higher guidance from Becton, Dickinson (BDX). The stock, however, dipped down 4% on the morning of the earnings report. I decided it was best to keep our Buy Below at $250 per share. That seemed like a nice, round number.

Well, the market kept to its trend. Not only did Becton make up the 4% loss, but it continued to rally past $250 and hit a new high. This is a really good company, and I don’t want investors to be left behind. That’s why this week, I’m bumping up our Buy Below to $260 per share.

While the big wave of earnings reports has passed us, we have three Buy List stocks with quarters that ended in July. They will be reporting earnings soon. JM Smucker (SJM) will report earnings on Tuesday, August 21. Ross Stores (ROST) and Hormel Foods (HRL) will report on Thursday, August 23. I should add that Ross has been acting very well lately. It’s up almost 15% this year. After those reports, we enter the quiet period for earnings reports. For nearly two months, only FactSet (FDS) and RPM International (RPM) will report. After that, the third-quarter earnings season will get underway in mid-October.

One other note on FactSet. Merrill Lynch said this week that it’s ditching Thomson Reuters as its primary data source and will now be using FactSet. That’s very good news. Merrill has 15,000 advisers. FDS jumped nearly 5% on Monday. I’m lifting our Buy Below on FactSet to $219 per share.

We also had good news from Fiserv (FISV). The board has authorized the company to buy back 30 million shares of stock. That’s about 7.5% of their outstanding shares. The stock broke out to another new high, and it’s a 20% winner for us this year.

That’s all for now. No Buy List earnings reports next week, but there are some key events to look out for. On Wednesday, we’ll get reports on retail sales and industrial production. The IP numbers have been looking better lately. On Thursday, we’ll get reports on housing starts and jobless claims. The jobless-claims numbers are still very close to the best figures since the 1960s. 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

Syndication Partners

I’ve teamed up with Investors Alley to feature some of their content. I think they have really good stuff. Check it out!

Buy These 3 REITs Thanks to the U.S. Supreme Court’s Internet Tax Ruling

In June, the U.S. Supreme Court reversed earlier tax rules to allow states to collect sales from online vendors who do not have a physical presence in a state. Before the ruling, a lot of Internet sales did not include the collection of sales taxes, giving online vendors a price advantage over local brick-and-mortar retailers. With the ruling, that advantage has been eliminated. The retail apocalypse has been postponed and now is a good time to pick up shares of high quality retail focused REITs.

The result of the fake “retail apocalypse” and the recent U.S. Supreme Court ruling is that now is a great time to pick up shares of mall and shopping center focused REITs. Here are three to consider.

This 8.5% High-Yield Stock Could See Its Share Price Jump 50%

In the IPO world, new biotech or consumer tech stocks get all the attention. The financial news keeps close track of how much a new tech IPO climbs the first few days after a public market launch. This makes great news bites, but it is hard for individual investors to participate. IPOs in the high-yield stock world get little or no attention. I make a point of finding and tracking new dividend stocks, and then recommending them to my subscribers when my analysis confirms attractive total return potential.

One such stock has returned 50% since I made the first recommendation last fall. The 2018 second-quarter earnings show that the positive run still has plenty of room to grow.

Morning News: August 10, 2018
Posted by Eddy Elfenbein on August 10th, 2018 at 6:55 am

Japan’s Economy Rebounds as Business Spends on Labor-Saving Tech

As Chinese Investors Panic Over Dubious Products, Authorities Quash Protests

In Times of Trade War, Companies Get Creative to Avoid Tariffs

Behind the $90 Billion Brawl Over Credit Card Swipes

WeWork Raises $1 Billion in Debt From SoftBank as Revenue Doubles

Amazon’s Spending on the Cloud Is Growing, but Not Nearly as Fast as Facebook’s

Dropbox Falls as COO Resignation Overshadows Earnings Beat

How Elon Musk’s Twitter Blocking Could Land Him In SEC Trouble

5 Reasons Why Disney Will Trade At $150 By End Of Next Year

Jewelry Maker Loses Its Sparkle

Party City Becomes Latest Retailer to Turn to Amazon for Growth

Lawrence Hamtil: Why You Should Not Bet On (High) Beta

Michael Batnick: The Scapegoat

Blue Harbinger: Is This The Calm Before The Storm?

Roger Nusbaum: Retirement Stats Are Grim But It Is Never Too Late To Start

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Fiserv Announces Buyback
Posted by Eddy Elfenbein on August 9th, 2018 at 11:36 am

Here’s the press release:

Fiserv, Inc. (FISV), a leading global provider of financial services technology solutions, announced that its Board of Directors has authorized it to repurchase 30 million shares of the company’s common stock, which is in addition to the shares remaining available under the company’s existing authorization.

Fiserv may repurchase shares in the open market or in privately negotiated transactions at the discretion of management, subject to its assessment of market conditions and other factors. This authorization does not expire.

Morning News: August 9, 2018
Posted by Eddy Elfenbein on August 9th, 2018 at 7:42 am

Russia Blasts New U.S. Sanctions Plan as Ruble, Stocks Slide

How China Wins the Trade War

Rite Aid and Albertsons Agree to Terminate Their Merger Agreement

Tribune Terminates $3.9 Billion Sinclair Merger, Sues Broadcast Rival

Mazda, Suzuki, Yamaha Motor Cheated on Fuel Economy, Emissions Testing: Japan Government

Tesla’s Biggest Problem Is Busy Tweeting

Never Mind Tesla, BMW’s the Real Deal for a Buyout

Playing Catch-Up With Walmart, Amazon Offers Digital Grocery Pickup at Whole Foods

New York City Votes to Cap Uber, Lyft Vehicle Licenses

Bearded Millennials are Causing a Crisis in the Razor Industry as the Unshaven Look Loses Its Bad Reputation

Oscars to Add `Popular Film’ Category, Creating Questions

With Alex Jones, Facebook’s Worst Demons Abroad Begin to Come Home

Cullen Roche: Three Things I Think I Think – Tesla X 3

Howard Lindzon: Congrats on the Sex America

Jeff Carter: Caps and Supports Make Markets Gum Up

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Morning News: August 8, 2018
Posted by Eddy Elfenbein on August 8th, 2018 at 9:22 am

World’s Biggest IPO in 2 Years Shows China’s 5G Ambitions

China Announces Date to Match $16 Billion U.S. Tariffs

Elon Musk Makes $82 Billion Gambit to Silence Tesla Critics

Elon Musk’s Plan to Take Tesla Private Could Obliterate Auto Industry’s Profits

Saudi Prince Alwaleed Acquires 2.3% Stake in Snapchat

Oracle Challenges Pentagon’s Multibillion-Dollar Cloud Computing Contract Before Bids Are Even Submitted

Ikea Arrives in India, Tweaking Its Products but Not Its Vibe

Disney Shares Fall as Company Misses Quarterly Earnings, Revenue Estimates

The N-Word Remark by Papa John’s Founder Caused Sales to Crater 10.5% in July

Salesforce Names Keith Block Co-CEO, Sharing the Top Job With Marc Benioff

Ford Rolls Out ‘Iron Man’ Tech For Auto Assembly Workers Across Globe

Hundreds Of Bikes Dumped At Dallas Recycling Center As Ofo Leaves Market

Nick Maggiulli: Hidden Costs

Jeff Carter: The Crypto Pump and Dump

Ben Carlson: Animal Spirits Episode 41: Despite All Logic

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Weakness in Defensive Stocks Today
Posted by Eddy Elfenbein on August 7th, 2018 at 2:50 pm

Here’s a good post for newer investors. Some stocks tend to group together based on similar behavior. A good example of this is stocks with high dividends. Investors will either reward or punish this key characteristic based on where we are in the economic cycle.

Dividend stocks have been lagging today. It’s nothing to be alarmed about. It’s simply a trend of the day. Here’s a chart showing the sector ETFs for utilities and real estate investment trusts. I use these two because both groups tend to have high dividends.

The chart shows their relative strength, meaning the ETF price divided by the S&P 500. This is important because it tells us how well the sector is performing relative to the rest of the market.

Notice how the blue and black lines tend to keep together. No, it’s not perfect, but it’s pretty decent considering how different the two industries are.

What happened is that towards the end of the last year, the perception was that the Federal Reserve was going to be more aggressive about raising interest rates. As a response, stocks with rich dividends (both sectors) lagged the market.

This is a good example of how a macro event can impact investing. I think it’s interesting how the market can look past the industry and focus on the characteristics of the security.

Morning News: August 7, 2018
Posted by Eddy Elfenbein on August 7th, 2018 at 7:07 am

Oil Rises on Saudi Output, Iran Sanctions

Turkey’s Cratering Markets Stoke Speculation Over Extreme Measures

Baidu’s Billionaire CEO Declares He Can Beat Google Again

Ola, India’s Ride-Hailing Startup, Is Taking on Uber in U.K.

Don’t Worry About the End of QE, Worry About Rates

The Stock Market’s Next $1 Trillion Milestone: Buybacks

Carl Icahn Publicly Opposes $54 Billion Cigna-Express Scripts Deal

Aardvark, the Only Producer Of Paper Straws In the U.S., Just Got Acquired

Alcoa Requests Reprieve From Trump’s Aluminum Tariffs

Facebook Denies Seeking Users’ Bank Data

Overseas Costs Drag on Profits at Domino’s Pizza; Shares Slide

How a Wells Fargo Computer Glitch May Have Sent Hundreds of Homeowners Into Foreclosure

Lawrence Hamtil: A Min Vol – Momentum Barbell for Overseas Markets

Cullen Roche: The Internet is not a Public Park

Howard Lindzon: Momentum Monday – Profits Matter

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Continental Building Products Soars
Posted by Eddy Elfenbein on August 6th, 2018 at 12:55 pm

Nice move from Continental Building Products (CBPX):