Industrial Production Rose 0.3%
Posted by Eddy Elfenbein on October 16th, 2018 at 9:52 am

More good news for the economy.

U.S. industrial production increased for a fourth straight month in September, boosted by gains in manufacturing and mining output, but momentum slowed sharply in the third quarter.

The Federal Reserve said on Tuesday industrial production rose 0.3 percent last month after an unrevised 0.4 percent increase in August. Industrial output grew at a 3.3 percent annualized rate in the third quarter after accelerating at a 5.3 percent pace in the second quarter.

The Fed said industrial output in September had been held down “slightly” by Hurricane Florence, which drenched South and North Carolina in mid-September. The U.S. central bank estimated the impact of the storm on industrial production as “less than 0.1 percentage point.”

Manufacturing output increased 0.2 percent in September after rising 0.3 percent in August.

A 1.7 percent increase in motor vehicle production helped to lift manufacturing output last month. Motor vehicle production surged 4.3 percent in August.

This bodes well for the GDP report which is due out next Thursday.

Morning News: October 16, 2018
Posted by Eddy Elfenbein on October 16th, 2018 at 6:58 am

China May Have $5.8 Trillion in Hidden Debt With ‘Titanic’ Risks

Currency Manipulation Isn’t Among China’s Trade Sins

The Fed’s 1 Million Lost Jobs

U.S. Credit Card Giants Flout India’s New Law on Personal Data

Google’s CEO Defends Potential Return to China

Landlords Across America Are Cheering Sears’ Bankruptcy

Fidelity Says It Will Trade Bitcoin for Hedge Funds

Jeff Bezos Chides Rivals, Says Amazon Will Continue to Work With Pentagon

Bank of America Profit Jumps 32%

Can 18 Hours in the Air Be Bearable? Airlines Bet on Ultra-Long-Haul Flights

Paul Allen, Billionaire Who Co-Founded Microsoft, Dies at 65

Climate Chnge to Cause Global Beer Shortage, Study Says

Nick Maggiulli: What is Your Financial Tipping Point?

Jeff Carter: Different Strokes For Different Exchanges

Joshua Brown: The Company That Saves Portfolio Managers From Themselves

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Some Stability Returns
Posted by Eddy Elfenbein on October 15th, 2018 at 11:51 am

The market is a lot calmer today after last week’s drama, but we’re not in the clear just yet. I expect more volatility soon.

As expected, Signature Bank (SBNY) confirmed that their earnings report will be on Thursday. I don’t know why it takes them so long. We have four Buy List reports on Thursday.

This morning’s retail sales report showed an increase of 0.1%. Economists were expecting an increase of 0.6%. We also saw the biggest drop in spending at bars and restaurants in nearly two years.

Excluding automobiles, gasoline, building materials and food services, retail sales jumped 0.5 percent last month. These so-called core retail sales correspond most closely with the consumer spending component of gross domestic product.

Data for August was revised down to show core retail sales were unchanged instead of the previously reported 0.1 percent gain. Consumer spending is being driven by a robust labor market, with the unemployment rate near a 49-year low of 3.7 percent. Tight labor market conditions are gradually pushing up wage growth.

The solid core retail sales increase in September pointed to strong consumer spending that should offset anticipated drags on economic growth from a widening trade deficit and persistent weakness in the housing market. Growth estimates for the third quarter are above a 3.0 percent annualized rate. The economy grew at a 4.2 percent pace in the second quarter.

Now I’m curious about next week’s GDP report. This will be our first look at Q3 growth. The Q2 number was pretty good: +4.2%. The problem with this expansion is that it’s been very hard to string together more than a few quarters of decent growth.

Sears Goes Bankrupt
Posted by Eddy Elfenbein on October 15th, 2018 at 11:19 am

After 126 years in business, Sears has gone under. This was both unexpected and completely expected. As a student of business, I have a soft spot for Sears. This was the Amazon of its day. The company invented modern retail. Sears catalogues were a regular part of American life for decades.

Sam: Cliff, you look terrible. Was today Sears catalogue day?

Cliff: And that’s not all, Spiegel’s catalogue came out the same day. Yeah, it’s a phenomenon that happens once every 27 years when both marketing strategies are in the same equinox.

Sears had the largest warehouses in the world and the largest building. So many innovations started at Sears: precision inventory control, Allstate, the Discover card, Dean Witter. Sears was a Dow component from 1924 to 1999.

Interestingly, Sears started as a mail-order watch business that eventually branched out into…well, everything. You could even buy a mail-order house.

Four years ago, Sears was going for $48 per share. Today it’s at 35 cents.

“How did you go bankrupt?”
“Two ways. Gradually, then suddenly.”

― The Sun Also Rises

Morning News: October 15, 2018
Posted by Eddy Elfenbein on October 15th, 2018 at 7:09 am

Saudi Arabia Breaks 45-Year Taboo With Veiled Oil Weapon Threat

Reality Breaks Up A Saudi Prince Charming’s Media Narrative

JP Morgan and Ford Cancel Plans for Saudi Investor Event

Trump’s New Iran Sanctions May Hit Snag With Global Financial Service

Trump Embraces Foreign Aid to Counter China’s Global Influence

Sears Goes Bankrupt, Mired in Debt and Deserted by Shoppers

Carl Icahn Blasts Dell’s Plan to Return to Public Markets

Disney Offers EU Antitrust Concessions Over $71.3 Billion Fox Deal

Bank of America Profit Beats Estimates on Cost Cuts, Loan Growth

L3 and Harris Agree to Merge, Creating $33.5 Billion Military Technology Giant

72% of Americans Don’t Believe Social Security Will Cover Their Retirement Spending

Jeff Miller: Can Earnings Season Spark a Rebound in Stocks?

Ben Carlson: Advice For Young People Trying to Break Into The Finance Industry

Howard Lindzon: What Does Careful Look LIke? and Hard Pennies & It Is OK To Panic If You Panic First

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CWS Market Review – October 12, 2018
Posted by Eddy Elfenbein on October 12th, 2018 at 7:08 am

“I think the Fed is making a mistake. It’s so tight, I think the Fed has gone crazy.”
– President Donald Trump

In last week’s CWS Market Review, I told you that the bears would strike again—and they did. On Wednesday, the Dow Jones Industrial Average shed 831 points for its worst loss in eight months. The market then followed that up with a further drop of 546 points on Thursday. That’s a staggering loss of 1,377 points in just 48 hours.

Suddenly, Wall Street is nervous. In the last six days, the Volatility Index is up 160%. The first thing I should tell you is don’t panic. While all this sounds bad, from a historical perspective, this week’s loss isn’t that unusual. In fact, this isn’t even our worst two-day drop of this year. The one from February still has this one beaten.

I am, however, cautious, and in this issue, I want to explain why. On Thursday, the S&P 500 closed below its 200-day moving average (see the green line in the above chart). This is a quick-and-dirty gauge of the stock market’s momentum. Historically, stocks have done better when they’re above their 200-DMA rather than below it. The S&P 500 had not closed below its 200-DMA in more than two months. In fact, if we go back further to March 2016, the S&P 500 has closed every day but two above its 200-DMA.

In this week’s CWS Market Review, we’ll discuss what has the market so spooked. Fortunately, our Buy List has done much better than the market this week (meaning, less badly). We’re also starting third-quarter earnings season soon. I’ll preview the first four earnings reports coming our way next week. But first, let’s look at the market’s October swoon.

Risk Returns to Wall Street

So what caused Wall Street’s ruction this week? That’s not so easy to say. Since something happened, we assume it has an identifiable cause, but that’s not the way it works with financial markets. Instead, a lot of different things happen all at once, in real time, and markets react.

Having said that, let’s round up some of the usual suspects. For one, the stock market has done so well for so long that it’s inevitable that we’re due for some sort of backlash. Not only have markets been happy, but they’ve also been calm. The S&P 500 went 74-straight sessions without a single one closing up or down by more than 1%. Many of those days, the index moved less than 0.5%. That’s not normal. Markets are dynamic things, and that demands action. This week, we got some.

There’s also the issue of interest rates. The Federal Reserve recently hiked interest rates. We all knew this was coming. The Fed has been pretty consistent about its intentions, so no one can claim they were caught off guard by the last rate hike.

What’s happened this time is that long-term interest rates have started to rise. Last Friday, the 10-year Treasury yield got to 3.23%. That’s up 90 basis points in the last year. The rise is because the economy has been getting better. The current climb in yields isn’t solely due to inflation, which continues to behave. Lenders are demanding more money for their money, and they’re getting it. For example, if we look at the inflation-protected bonds, we see yields rising. Last week, the yield on the five-year TIPs topped 1%. That’s stronger competition for stocks, so some reaction from stocks is expected.

Here’s the S&P 500 minute-by-minute over the last two weeks.

Rising rates also take some energy out of the economy, particularly in the housing market. Mortgage yields are now at a seven-year high, and the housing market is beginning to show some cracks. If rates go from 4% to 5%, that adds $150 per month to a $250,000 mortgage. That prices a lot of homebuyers out of the market. Existing home sales have fallen for six months in a row. There are cracks appearing in an otherwise solid foundation. For example, unsold high-end homes in New York City are piling up.

The Homebuilder ETF (XHB) fell for 13 days in a row. It rose slightly and then fell sharply for three more days. We can see the impact on our Buy List with stocks like Sherwin-Williams (SHW) and Continental Building Products (CBPX).

I should add that our Buy List has held up well during the recent selloff. On Wednesday, the Buy List beat the S&P 500 by 84 basis points. Interestingly, the selloffs on Wednesday and Thursday had very different profiles. Wednesday’s drop was heavily concentrated on tech stocks. The FAANG stocks lost $175 billion in market value. But on Thursday, defensive and value stocks fell more than riskier stocks did.

That’s the opposite of what you’d usually expect. If I were told that the Nasdaq beat the Dow by 1%, as it did on Thursday, then I’d naturally assume it was a strong up day for Wall Street. Instead, we lost over 2%.

Let’s remember that Wednesday’s fall doesn’t even crack the Top 50 of worst days of the last 20 years. There was a nine-week period in 2008 when we had five days twice as bad as Wednesday. This Wednesday was also the tenth anniversary of the greatest intra-day reversals in history. The Dow dropped 8.12%, then rallied to +3.75%, and closed for a measly loss of 1.49%. If you’re historically-minded, two bear markets ended on October 10th: one in 1990 when the Dow was at 2,365, and the other in 2002 when the Dow was at 7,181. The latter one ended at 10:10 am on 10/10.

There’s also the issue of trade. The Trump Administration has ratcheted up the rhetoric in its approach toward China. Trade is still a small part of our overall economy, but this is having an impact. Consider that 85% of toys sold in the United States are made in China. As I pointed out in this week’s epigraph, President Trump lays the blame for the recent turbulence on the Fed. Meanwhile, the Chinese stock market has been in a tailspin. High-profile Chinese stocks like Alibaba (BABA) and Tencent (TCEHY) have been getting smacked down.

It’s not good for us if the Chinese economy goes off the rails. They’re a key trading partner, plus they own a good share of our treasury debt. I think this is clearly a factor in this week’s drop. Hopefully, the Trade War talk and retaliations will subside before serious damage is done.

The bears are easily startled, but they’ll soon be back, and in greater numbers. For us, we need to focus on high-quality Buy List stocks. Here’s our game plan. In order.

1. Don’t panic
2. Expect more drops
3. Be patient
4. Wait for bargains

Let the other guys panic. The Buy List has outstanding stocks, and we’ll see more proof of that over the next few weeks as earnings season dominates the news.

Four Buy List Earnings Reports Next Week

Over the next three weeks, 20 of our 25 Buy List stocks are due to report Q3 earnings. Here’s a preliminary earnings calendar with each stock, the earnings data and Wall Street’s estimate. I don’t have all the dates just yet (some companies are better at that than others). Four of our stocks are due to report next Thursday.

Alliance Data Systems (ADS), the loyalty rewards company, started off the year terribly By May, ADS was down more than 20% for us. But it turned around and regained a lot of lost ground. That rally hit the rocks a few weeks ago, and ADS has been trending lower again. This past week didn’t help matters.

I’ll credit ADS for consistently standing by its full-year earnings forecast of $22.50 to $23 per share. That means the stock is currently going for less than 10 times this year’s earnings. The consensus on Wall Street is for Q3 earnings of $6.24 per share. Recently, an analyst at Bank of America Merrill Lynch started coverage of ADS with a buy and gave it a $290 price target. I’ll be curious to hear any guidance for 2019.

Three months ago, Danaher (DHR) gave us another nice earnings beat, but that wasn’t the big news. The company also announced that it will spin off its dental business next year. That business currently accounts for about 20% of Danaher’s revenues. For Q2, Danaher made $1.15 per share. The company had told us to expect Q2 earnings between $1.07 and $1.10 per share. Danaher also raised its full-year earnings range to $4.43 to $4.50 per share. For Q3, Danaher expects earnings to range between $1.05 and $1.08 per share.

The company has been in the news lately because its former CEO, Larry Culp, has been selected as GE’s new CEO. Going by his performance at Danaher, that’s a very wise choice.

Snap-on (SNA) was our big winner last earnings season. The company said that Q2 earnings rose 20% to $3.11 per share. That beat the Street by 16 cents per share. The stock responded by jumping 9.5%. This could be a trend for Snap-on. The stock jumped more than 6% after the Q1 earnings came out in April.

For Thursday, Wall Street expects Q3 earnings of $2.86 per share. That’s an increase of 16% over last year. Thanks to the recent downdraft, SNA is going for 13 times next year’s earnings. I also expect to see another dividend increase from Snap-on in early November. In the last five years, SNA’s dividend has more than doubled.

I’m also going to include Signature Bank (SBNY). Although the bank hasn’t formerly announced its earnings date, going by its regular schedule, I’m guessing it will be on Thursday. This has been a frustrating stock to own. The shares are currently less than 3% above their 52-week low. The narrowing yield curve is taking its toll on Signature’s valuation.

Despite the drop, I think SBNY looks very good. The shares are going for about 10 times next year’s earnings estimate. The bank also initiated its first dividend of 56 cents per share. Going by Thursday’s close, that works out to a yield of 2%.

Total deposits now stand at $34 billion. That’s an increase of 5.5% in the last year. Loans are up 12.4% to $34.15 billion. Net interest margin, which is the key metric for banks, came in at 2.94% for Q2. Those are decent numbers. For Q3, the consensus on Wall Street is for earnings of $2.83 per share.

That’s all for now. Earnings season will start to ramp up next week. We’ll also get a few key economic reports. On Monday, the retail-sales report for September comes out. Then on Tuesday, we’ll get our latest look at industrial production. Wednesday is housing starts plus the minutes to the last Fed meeting. The exiting-home sales report comes out on Friday. 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!

Two Stocks to Buy in Japan’s Quiet Bull Market

It’s the bull market that almost no U.S. investor has heard about. But it is a very real and vibrant bull market. What am I talking about?

The Japanese stock market, which last week hit a 27-year high!

After Japan’s “bubble economy” collapsed in the early 1990s, its entered a long period of recession and stagnation. In the late 1990s, conditions got even worse as a financial crisis hit some of its leading financial companies, such as Yamaichi Securities and the Long-Term Credit Bank of Japan. The Nikkei index continued drifting downward after that, hitting the 7,054.98 mark on March 10, 2009 as the global financial crisis took its toll.

But then, the second Abe government began in December 2012, and its so-called Abenomics economic strategy, including an ultra-easy monetary policy from the Bank of Japan, took both Japan’s economy and stock market into a long upward trend, which has continued to this day.

If you are looking to invest into Japan’s bull market, please do NOT use ETFs. If you do, your performance will be held back by the banks and other similar companies in the index that offer little growth.

Instead, stick with individual stocks as I have with the Growth Stock Confidential portfolio that currently holds three Japanese stocks with great growth potential.

Morning News: October 12, 2018
Posted by Eddy Elfenbein on October 12th, 2018 at 7:03 am

Behind Market Turmoil, Potentially Good News

100 Million Barrels: The World Hit a Daily Oil and Liquids Record

World’s Largest Car Market Faces Historic Drop

Interest Rates Are Rising for All the Right Reasons

U.S. Treasury Staff Finds China Isn’t Manipulating Yuan

The Biggest Buyers of American Stocks Are on the Sidelines Right Now

BlackRock Wins $40 Billion Chunk of Lloyds Investment Pile

JPMorgan Profit Boosted by Higher Interest Rates

SoftBank Picks Nomura, Goldman, Three Others to Lead Mobile Unit’s IPO

Retail’s New E-Commerce Headache: Delivering Workers to Warehouses

Tencent Music Pauses IPO Amid Market Turmoil

Why Google Could Be in Trouble Over the Google Plus Bug

Joshua Brown: And Then They Came for the Tech Stocks…

Blue Harbinger: Do You Pretend To Understand The Market?

Cullen Roche: Telling People Not to Panic Isn’t Good Enough

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Morning News: October 11, 2018
Posted by Eddy Elfenbein on October 11th, 2018 at 7:15 am

Stock Rout Spreads as Bonds, Currencies Stay Calm: Markets Wrap

Europe Stocks Extend Loss in Global Selloff

Not Just ‘Loco’ Fed: Why Equities Are Suddenly Selling Off Now

Interest Rates Are Rising. That’s Great News for Most.

In New Slap at China, U.S. Expands Power to Block Foreign Investments

At IMF-World Bank Meetings, Powell Praised as Trump Calls Fed ‘Crazy’

Mounting Costs Add to Worries About 2019 U.S. Profit Growth

CVS Health and Aetna $69 Billion Merger Is Approved With Conditions

BMW to Take Control of China Joint Venture in $4 Billion Deal

WarnerMedia Plans to Unveil Streaming Service by End of 2019

Wells Fargo Touts Good Deeds to Get Back in Lawmakers’ Good Graces

A Future Where Everything Becomes a Computer Is As Creepy As You Feared

Jeff Carter: Sometimes You Have to Look at Accounting

Roger Nusbaum: Because Every Now And Then The Market Goes Down

Michael Batnick: U-G-L-Y

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The Market Finally Cracks
Posted by Eddy Elfenbein on October 10th, 2018 at 1:03 pm

At 1 pm, the S&P 500 is currently down about 1.4%. That would make it the worst day for stocks since April. Of course, that really says more about the last six months than it does about today.

Yesterday was a bad day for anything involved in building. Today’s pain is more concentrated on tech. There are also losses in high-end retailing. Also, most footwear stocks are getting hit.

Morning News: October 10, 2018
Posted by Eddy Elfenbein on October 10th, 2018 at 7:16 am

Two-Decade Rupture in Stock-Bond Link Flashes Global Market Pain

Big Oil’s Bet on Natural Gas Is a Slow Burn

Soaring Rice Prices are Dulling Duterte’s Luster in the Philippines

China’s About to Sell Dollar Bonds in Middle of a Trade War

The Unknowable Fallout of China’s Trade War Nuclear Option

Powell Places Risky Bet as He Stokes Too-Good-to-Be-True Economy

Sears Hires Advisers to Prepare Bankruptcy Filing

Google Appeals $5 Billion EU Fine in Android Case

New Pixel Phones and Other Gadgets Keep Google in the Hardware Hunt

Millennials Kill Again. The Latest Victim? American Cheese

Shipping Industry Stares Down New Fuel Restrictions

Amazon Scraps Secret AI Recruiting Tool That Showed Bias Against Women

Nick Maggiulli: Why The Best Predictor of Future Stock Market Returns is Useless

Joshua Brown & Michael Batnick: What Are Your Thoughts: Interest Rate Freakout

Ben Carlson: The Case for Bonds

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