Morning News: June 11, 2018
Posted by Eddy Elfenbein on June 11th, 2018 at 7:12 am

Oil Slips on Signs Russia Boosted Crude Output Before OPEC Meets

Swiss Voters Reject Radical Sovereign Money Plan in Landslide

Now the Fed Must Reckon With Long-Term Strategy

The Repeal of Net Neutrality Is Official. Here’s How That Could Affect You.

Bitcoin Tumbles as Hackers Hit South Korean Exchange Coinrail

KKR Nears Deal to Buy Envision Healthcare

Amazon Is Being Blasted by a Watchdog Group Over China Echo Factory Conditions

AT&T Judge Could Clear Time Warner Deal With ‘No Blackout’ Fix

Xiaomi Unveils Big Loss as It Prepares to Hawk IPO to Investors

GDPR: The Biggest Data Breaches And The Shocking Fines (That Would Have Been)

Bidding for Fox Will Get Serious After Court Ruling

Stitch Fix: Risen From The Ashes

Ben Carlson: Is the U.S. Due For A Recession?

Jeff Miller: Do Individual Investors Face a Pivotal Decision?

Joshua Brown: You Have to Live Through the Statistics

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CWS Market Review – June 8, 2018
Posted by Eddy Elfenbein on June 8th, 2018 at 7:08 am

“If you would know the value of money, go and try to borrow some.”
– Benjamin Franklin

The stock market suddenly got a lot more interesting this week. The Nasdaq Composite broke out to a new all-time high. So did the small-cap Russell 2000. The Dow is back over 25,000, and the S&P 500 rallied for four days in a row. The index recently touched its highest point in more than two months.

The market isn’t so much celebrating good news as it is feeling relieved that the prospect for bad news has dissipated. Global tensions seem to be relaxing. There may even be some sort of détente with North Korea. In the last few weeks, the price of oil has dropped more than 10%.

One piece of good news came last Friday when the government said that the unemployment rate fell to its lowest since the 1960s. In this week’s issue, we’ll take a closer look at the market and the economy. I’ll also discuss the disappointing earnings report from Smucker. I also have several Buy List updates for you this week (nice rebound for Ross Stores!). But first, is this really the best economy in half a century?

The Best Economy in 50 Years?

Last Friday, the government released the jobs report for May, and it said that the U.S. economy created 223,000 net new jobs last month. That figure beat expectations of 190,000 jobs. The unemployment rate ticked down to 3.8% which tied the cycle low from April 2000. However, if you work out the decimals, the jobless rate is actually the lowest since the 1960s. (Well, since December 1969.) For women, it’s the lowest jobless rate since 1953.

Despite the good news, there are some noticeable holes in the current expansion. For one, it’s always a bit dicey to compare unemployment rates over such a long period of time. The economy is quite different from what it was in 1960, and so is the labor market. While the economic numbers are improving, we’re still not seeing much in the way of wage growth. In the last year, average hourly earnings were up 2.7%. That’s okay, and it’s above inflation, but it needs to be better. The equation is simple: higher wages means more shoppers.

The Federal Reserve meets again next week, and it’s a near-certainty that the central bank will raise interest rates. This will be their seventh increase of this cycle. To recap, the Fed raised rates once in 2015, another time in 2016, then three times last year and already once more this year. This will bring the target range for Fed funds up to 1.75% to 2%.

Not too long ago, it looked like there might be four hikes this year, but that’s probably off the table. For now. With this meeting, we’ll get a post-meeting press conference with Chairman Jay Powell. The Fed members will also update their economic forecasts. These forecasts are notoriously poor, but I have to give the Fed some credit: they’ve largely stuck to their recent rate-hike plans.

I’ve tried to stress to investors that rising interest rates are Kryptonite to a stock rally. However, and this is crucial, it usually takes a few hikes to do any real damage. We’re now getting close to the point where the Fed funds rate is equal to the dividend yield of the S&P 500. In 2009, that would have seemed like it was light-years away.

I like to keep track of the “real” Fed funds rate. That’s the rate adjusted for inflation (I prefer using the core rate). After next week’s hike, the real Fed funds rate will be very close to something it hasn’t been in a long time—a positive number! In real terms, the Fed has been handing out free money for over a decade. I think we’ll need one more hike to finally push real Fed funds into positive territory. As a very general rule, it’s hard to be against stocks when the Fed is handing out free checks. The Fed’s low-rate policy has certainly been a key driver of this long rally.

But what about next year? According to the Fed’s last projections, they see three more hikes next year. But there was wide dispersion, meaning the individual estimates are far apart. That’s why next week’s meeting is so important. We’ll probably get a better idea of the Fed’s thinking. Three more hikes could do some damage to the economy and the market.

There are a few things to consider. One is that long-term rates have come down some. That’s kinda like the ceiling for short-term rates. Trouble usually happens when short rates exceed long rates. My favorite indicator is the 2/10 Spread which is now at 45 basis points. That’s down about 90 basis points in the last 18 months. We’re not in the danger zone yet, but it’s no longer unthinkable.

Smucker Drops after Poor Earnings

On Thursday, JM Smucker (SJM) got dinged for a 5.4% loss after the jelly company reported disappointing earnings. Smucker reported fiscal Q4 earnings (after a few adjustments) of $1.93 per share, which was well below the company’s own guidance of $2.17 to $2.27 per share. Wall Street had been expecting $2.18 per share. The CEO blamed the miss on “industrywide headwinds and certain discrete items.” More on that in a bit.

Smucker also had disappointing guidance for the coming year. Smucker sees this year’s earnings (ending in April) coming in between $8.40 and $8.65 per share. Wall Street had been expecting $9.18 per share.

There are a few reasons for Smucker’s slide. For one, Canada announced retaliatory tariffs on American jam which is a core SJM product. The company is also facing higher costs which places it in the tough position of passing said costs on to consumers. This is a tough environment in which to raise prices. Bear in mind that Smucker is a lot more than jelly. They also make Jif peanut butter and Folger’s coffee, and they have a pet-food division, which is the company’s largest.

Last quarter, sales of Smucker’s consumer foods fell by 1.8%. Pet food was flat, while coffee was up 0.5%. For the quarter, net sales fell by 0.1%. The issue really comes down to pricing and how much latitude Smucker truly has. Everyone in the industry is facing the same issue. These results suggest that Smucker may have to give in and deal with lower margins. To be fair, Smucker has already started to adjust its business model to better compete in a challenging market. For example, they’re looking to sell off their baking business.

Last year, Smucker made $7.96 per share. The stock closed Thursday at $100.80, which is exactly 12 times the lower bound of their full-year guidance. This week, I’m dropping my Buy Below on Smucker down to $114 per share. I still like Smucker, but the company needs to make some important adjustments in order to meet a difficult environment.

Buy List Updates

Our philosophy of investing is to focus on great companies and hold them as long as we can. This has two important benefits. The first is that it’s less work, which is always nice. But more importantly, it’s a superior system because it removes us from the irrationality of the day-to-day market. I often stress this, but we got a good lesson recently from Ross Stores (ROST).

I’m a big fan of Ross, and it’s been part of our Buy List for several years. The deep-discounter reported earnings on May 24. They beat expectations, but their guidance wasn’t that hot. Well, that’s what Ross always does, so I paid it no mind. I thought the earnings report was just fine, but the market gods were not pleased. Shares of ROST dropped nearly 7% the next day.

In last week’s issue, I wrote, “I’m not at all worried about Ross Stores.” Sure enough, Ross has rallied six times in the last seven days. The stock closed Thursday at $85.09. Not only did Ross make back everything it lost, but the stock is even higher than it was going into earnings.

I will freely admit you that I had no idea Ross would snap back so quickly. Of course, I was puzzled by the drop in the first place. But this is the reality of stock investing. Sometimes, weird things happen. This is precisely why we lock in on great companies and let time do the heavy lifting. This week, I’m raising my Buy Below on Ross Stores to $90 per share.

Another stock that’s rising from the ashes is Alliance Data Systems (ADS). Poor ADS has been one of our worst stocks this year. The stock went from a high of $278 in January down to $192 in early May. The last earnings report was pretty good, but that wasn’t enough to halt the selling. Lately, however, ADS has turned a corner. The shares closed Thursday at $220.57. It’s too early to declare victory, but things are finally going in the right direction. Check out this recent article from Forbes, “Why Alliance Data Is Trading at a Discount.”

Carriage Services (CSV) made some news this week, which is pretty rare. The funeral-home company made some complicated moves to restructure its balance sheet. This was to correct for, in their words, “unforced errors.” Since the company had to issue more shares, they reduced their four-quarter EPS guidance to $1.33 to $1.38. I think the moves are to Carriage’s long-term benefit. Don’t abandon this one.

In early May, Continental Building Products (CBPX) missed earnings by a penny per share. During the next trading day, the stock got as low at $25.70 per share. That was a loss of over 7%. I was impressed that the company didn’t change its full year forecast. Here we are five weeks later, and CBPX is up to $31.45 per share. That’s a 14% gain in the last 23 days. I’m raising our Buy Below on Continental Building to $34 per share.

We’re done with Buy List earnings reports for a while. FactSet (FDS) is due to report on June 26, but that’s it until the Q2 earnings season starts up in mid-July. RPM International’s (RPM) fiscal fourth quarter ended in May, and their earnings will probably be out in late July.

That’s all for now. Get ready for a Fed rate hike next week. The Federal Reserve meets on Tuesday and Wednesday. The policy statement will come out at 2 p.m. on Wednesday. We’ll also get a look at the updated forecasts. There will also be some key economic reports. The retail-sales report will come out on Thursday. Then on Friday, we’ll get to see the latest report on industrial production. 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

Morning News: June 8, 2018
Posted by Eddy Elfenbein on June 8th, 2018 at 7:04 am

Argentina Reaches $50 Billion Financing Deal With I.M.F.

Brazil Hosts Major Auction for Oil Fields

Oil Prices Fall on Dip in China Demand, Surging U.S. Output

As Utility Stocks Get Crushed, Possibilities Emerge

Betting on Crisis, Hedge Funds Short Italian Bonds

Banks Don’t Share Wells Fargo’s ‘Systemic’ Account Problems, Regulator Says

Spare Us, Warren Buffett

How the Gig Economy Is Reshaping Work: Not So Much

Jack Ma’s Ant Financial Valued Around $150 Billion After Funding Round

Google Renounces AI Weapons; Will Still Work With Military

Tesla’s Energy Storage Business Is Surging

KFC is Right — People Are Gobbling Up ’Meat Replacements’

Lawrence Hamtil: Not Even Buffett Can Escape the Reversion to the Mean

Roger Nusbaum: Indexing Will Fail? Really?

Blue Harbinger: Do You Start the Day With a Trading Plan?

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Smucker Drops on Earnings Miss
Posted by Eddy Elfenbein on June 7th, 2018 at 12:08 pm

This morning, JM Smucker (SJM) reported fiscal Q4 earnings (after a few adjustments) of $1.93 per share which was well below the company’s own guidance of $2.17 to $2.27 per share. The CEO blamed the miss on “industrywide headwinds and certain discrete items.”

The company also had disappointing guidance for the coming year. Smucker sees this year’s earnings coming in between $8.40 and $8.65 per share. Wall Street had been expecting $9.18 per share.

The WSJ reports:

J.M. Smucker is among several companies trying to figure out what consumers want in their kitchens. Other food companies like Kraft Heinz Co. and Campbell Soup Co. have struggled with sales in recent times as customers’ food choices change.

At the same time, J.M. Smucker has been working to change its business mix.

In April, the company said it was looking at options for its baking business, such as selling it. That business includes the Pillsbury brand. That same day, the company said it had agreed to buy Ainsworth Pet Nutrition LLC, a deal J.M. Smucker said it valued at $1.7 billion.

The company also launched a higher-end version of its Folgers brand in April. Mr. Smucker had said the company was “trying to strike the right balance between leading, iconic brands and emerging brands.”

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

Hong Kong’s China Loan Pipe Is Gurgling Too Loud

U.S. Trade Deficit Falls to 7-Month Low as Exports Set Fresh Record

U.S. Congress Has Few Options to Stop Trump from Saving China’s ZTE

The Simple Message From the Trustees of Social Security and Medicare

Mick Mulvaney Effectively Fires CFPB Advisory Council

Landline Phone Service, Which Still Exists, Goes Down Across the U.S.

New Bitcoin ETF Would Set Buyers Back $200,000

Coinbase Expands With Deal for Broker-Dealer Keystone Capital

Uber Jumps Into Europe’s Crowded Bike-Sharing Market

How I Learned to Stop Worrying and Love Electric Scooters

You Can Now Drive As Many Mercedes-Benz Cars As You Want For $1,095 a Month

IHOP Is Changing Its Name And The Internet Can’t Handle It

Cullen Roche: The Vollgeld Proposal is Bad. Very Bad.

Ben Carlson: Animal Spirits: Big Mistakes

Joshua Brown: Breaking Away

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The Surging Market
Posted by Eddy Elfenbein on June 6th, 2018 at 12:10 pm

The S&P 500 is now up for the fourth day in a row. The index is near its highest levels in more than two months.

The S&P 500 is also above its 50- and 200-day moving averages. The real winner lately has been the Nasdaq Composite which just touched a new all-time high.

I’m glad to see Alliance Data Systems (ADS) up to $220 today. ADS was down to $193 a month ago.

Morning News: June 6, 2018
Posted by Eddy Elfenbein on June 6th, 2018 at 7:16 am

India Sees Record Low Solar Prices Returning on China Reforms

The Next Bond Rout: It’s Bigger Than Italy

The ECB is About to Take a Key Step Toward an Easy-Money Exit

Social Security to Tap Into Trust Fund for First Time in 36 Years

Teamsters Vote to Authorize Strike as UPS Contract Talks Heat Up

China’s ZTE Signed Preliminary Agreement to Lift U.S. Ban

Wells Fargo Pulls Back from U.S. Midwest, Selling 52 Branches to Flagstar

Elon Musk Appears Emotional As He Overcomes Vote to Remove Him as Tesla Chairman

David Koch Steps Down From Business and Conservative Political Group

Scooters Are Cool, But Not $1 Billion Cool

IHOP Is Getting a New Name. And It Doesn’t Include Pancakes

Why Women Hold the Majority of Student Loan Debt in America

Nick Maggiulli: Reps, Reps, Reps

Howard Lindzon: Momentum Monday…You Do Not Need to Own Everything

Michael Batnick: Animal Spirits: Big Mistakes

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College Investor’s Top Investing Blogs of 2018
Posted by Eddy Elfenbein on June 5th, 2018 at 12:50 pm

Thank you to College Investor for naming me as one of their top investing blogs for 2018. Check out the whole list here. There are many outstanding blogs listed.

Howard Schultz is Stepping Down at Starbucks
Posted by Eddy Elfenbein on June 5th, 2018 at 10:40 am

Howard Schultz said he’s stepping down as executive chairman of Starbucks (SBUX). There’s been talk that he might run for president.

I’ll skip that topic to focus on the long-term performance of Starbucks. It’s been a truly remarkable company. They IPO’d 26 years ago this month at 27 cents per share (that’s $17 adjusted for six 2-for-1 splits.) Today, it closed at $57.07. Not bad.

Schultz had two runs as CEO, from 1986 to 2000 and then again from 2008 to 2017. He came on after the stock’s one terrible stretch.

Thanks to over-expansion, the stock fell from an intra-day high of $10 per share on November 16, 2006 down to $1.765 on November 21, 2008. Eighty percent losses tend to upset shareholders and that’s why Schultz was brought back. He helped turn the ship around, and today, there are more than 26,000 locations.

The company started paying a five-cent quarterly dividend in 2010. That’s been raised every year since then, and it’s now up to 30 cents per quarter. That’s a payout ratio of around 50%.

Morning News: June 5, 2018
Posted by Eddy Elfenbein on June 5th, 2018 at 7:15 am

Crude Oil Kissing $80, OPEC Whispers, and the Implications for E&P

Trump Plan to Prop Up Coal, Nuclear Won’t Protect the Electric Grid

ANZ, Citi, Deutsche Bank Accused of Engaging in Cartel Conduct

Gilt Groupe Sold to Rival Rue La La

What to Watch for as Tesla Investors Decide the Future of Musk’s Board

GitHub Billionaires Will Own More Microsoft Stock Than Its CEO

Toshiba to Close the Book on Its Laptop Unit

Qantas Gives In to Beijing’s ‘Orwellian’ Demand to Change How It Refers to Taiwan

Walmart Sheds Majority Stake in Brazil Operation

In Biotech, $6 Billion Can Vanish Quickly

McDonald’s Is Making a Big Bet on Self-Service Kiosks

Michael Batnick: The Next Fifty Years

Howard Lindzon: Financial Pardons (Do Not Count on Them) and Taking Profits is Not a Crime

Jeff Carter: Crypto And Term Sheet & Regulation and the Retail Investor

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