Powell’s Testimony
Posted by Eddy Elfenbein on July 17th, 2018 at 10:06 am

Fed Chairman’s Jay Powell testified today before Congress. Here are some highlights:

Since I last testified here in February, the job market has continued to strengthen and inflation has moved up. In the most recent data, inflation was a little above 2 percent, the level that the Federal Open Market Committee, or FOMC, thinks will best achieve our price stability and employment objectives over the longer run. The latest figure was boosted by a significant increase in gasoline and other energy prices.

An average of 215,000 net new jobs were created each month in the first half of this year. That number is somewhat higher than the monthly average for 2017. It is also a good deal higher than the average number of people who enter the work force each month on net. The unemployment rate edged down 0.1 percentage point over the first half of the year to 4.0 percent in June, near the lowest level of the past two decades. In addition, the share of the population that either has a job or has looked for one in the past month–the labor force participation rate–has not changed much since late 2013. This development is another sign of labor market strength. Part of what has kept the participation rate stable is that more working-age people have started looking for a job, which has helped make up for the large number of baby boomers who are retiring and leaving the labor force.

Another piece of good news is that the robust conditions in the labor market are being felt by many different groups. For example, the unemployment rates for African Americans and Hispanics have fallen sharply over the past few years and are now near their lowest levels since the Bureau of Labor Statistics began reporting data for these groups in 1972. Groups with higher unemployment rates have tended to benefit the most as the job market has strengthened. But jobless rates for these groups are still higher than those for whites. And while three-fourths of whites responded in a recent Federal Reserve survey that they were doing at least okay financially in 2017, only two-thirds of African Americans and Hispanics responded that way.

Incoming data show that, alongside the strong job market, the U.S. economy has grown at a solid pace so far this year. The value of goods and services produced in the economy–or gross domestic product–rose at a moderate annual rate of 2 percent in the first quarter after adjusting for inflation. However, the latest data suggest that economic growth in the second quarter was considerably stronger than in the first. The solid pace of growth so far this year is based on several factors. Robust job gains, rising after-tax incomes, and optimism among households have lifted consumer spending in recent months. Investment by businesses has continued to grow at a healthy rate. Good economic performance in other countries has supported U.S. exports and manufacturing. And while housing construction has not increased this year, it is up noticeably from where it stood a few years ago.

I will turn now to inflation. After several years in which inflation ran below our 2 percent objective, the recent data are encouraging. The price index for personal consumption expenditures, which is an overall measure of prices paid by consumers, increased 2.3 percent over the 12 months ending in May. That number is up from 1.5 percent a year ago. Overall inflation increased partly because of higher oil prices, which caused a sharp rise in gasoline and other energy prices paid by consumers. Because energy prices move up and down a great deal, we also look at core inflation. Core inflation excludes energy and food prices and generally is a better indicator of future overall inflation. Core inflation was 2.0 percent for the 12 months ending in May, compared with 1.5 percent a year ago. We will continue to keep a close eye on inflation with the goal of keeping it near 2 percent.

Looking ahead, my colleagues on the FOMC and I expect that, with appropriate monetary policy, the job market will remain strong and inflation will stay near 2 percent over the next several years. This judgment reflects several factors. First, interest rates, and financial conditions more broadly, remain favorable to growth. Second, our financial system is much stronger than before the crisis and is in a good position to meet the credit needs of households and businesses. Third, federal tax and spending policies likely will continue to support the expansion. And, fourth, the outlook for economic growth abroad remains solid despite greater uncertainties in several parts of the world. What I have just described is what we see as the most likely path for the economy. Of course, the economic outcomes we experience often turn out to be a good deal stronger or weaker than our best forecast. For example, it is difficult to predict the ultimate outcome of current discussions over trade policy as well as the size and timing of the economic effects of the recent changes in fiscal policy. Overall, we see the risk of the economy unexpectedly weakening as roughly balanced with the possibility of the economy growing faster than we currently anticipate.

Morning News: July 17, 2018
Posted by Eddy Elfenbein on July 17th, 2018 at 8:35 am

The Oil Market Is Getting More Dangerous

IBM Is Experimenting With a Cryptocurrency That’s Pegged to the US Dollar

Netflix’s Q2 Earnings in 3-Must See Metrics

Goldman Sachs Makes it Official: David Solomon to Become Next CEO, Replacing Lloyd Blankfein

Didi Seeks $1.5 Billion Car Services Spinoff Ahead of Likely IPO

Jeff Bezos Named Richest Man in History as Amazon Workers Strike Over Pay And Conditions

Amazon Foes Walmart and Microsoft Deepen Tech Partnership

Salesforce Acquires Datorma for a Reported $800 Million

How Tesla Stacks Up Against America’s Most Productive Car Factories

CRISPR Therapeutics Stock History: The Rise of the World’s Biggest Gene-Editing Biotech

Ford Agrees to Pay $299.1 Million to Resolve Air-Bag Lawsuit

Papa John’s Founder Says Resignation Was a Mistake

Lawrence Hamtil: Exploring Why P/E 10 Works Better In Some Markets Than Others

Joshua Brown: It’s Always a Remix

Jeff Miller: Anything Goes!

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Alliance Data Drops Sharply
Posted by Eddy Elfenbein on July 16th, 2018 at 10:17 am

Shares of Alliance Data Systems (ADS) are down sharply this morning. This morning, the company reported its metrics for June.

I don’t think the numbers were that bad. However, we’ll know a lot more when ADS reports their earnings this Thursday.

The Long End Is Nearly Flat
Posted by Eddy Elfenbein on July 16th, 2018 at 10:04 am

The long end of the yield curve is nearly flat. Just four basis points separates the 10- and 20-year Treasuries. You can see similar effects on other points. This is the tightest the long end has been since the 2000 market peak.

Retail Sales Rose 0.5% in June
Posted by Eddy Elfenbein on July 16th, 2018 at 9:32 am

The consumer is still behaving well. This morning, the Census Bureau said that retail sales rose 0.5% last month. They also revised the figure for May up to +1.3%. If you take away cars and gas, then retail sales rose 0.3% last month.

From Bloomberg:

At the same time, a key subset of the data signaled less momentum: So-called retail-control group sales, which are used to calculate gross domestic product and exclude food services, auto dealers, building materials stores and gasoline stations, were unchanged in June after an upwardly revised 0.8 percent increase. The median estimate of economists was for a 0.4 percent gain in June.

A tight labor market and lower taxes have supported solid gains in household purchases, the biggest part of the economy. That, along with steady business investment, are among reasons growth was projected to double in the second quarter from the first three months of the year. Economists expect the pace of gains in household purchases to settle back in coming quarters.

Americans are increasingly concerned about the effects of Trump administration tariffs, which risk backfiring on consumption and the economy, though the levies largely haven’t yet been passed down to consumers.

As long as consumers are happy, then the economy will hold on. But all bets are off if this trade stuff gets out of hand.

Morning News: July 16, 2018
Posted by Eddy Elfenbein on July 16th, 2018 at 7:03 am

China’s Cooling Economy Spells Trouble Ahead for Global Growth

China’s Strong Economic Growth Figures Belie Signs of Weakness

Rebates Protect Canada’s Auto Industry From Retaliatory Tariffs

Boeing, Airbus Strain to Deliver the New Jets They Have Promised

Northrop Grumman Upbeat on Talks for German Drone Contract

Embraer Pushes E2 Jet’s Low Maintenance, Fuel Costs Amid Airbus Rivalry

Lockheed Martin Reaches ‘Handshake Deal’ Deal for 141 F-35 Jets

Goldman Expected to Formally Name Successor to C.E.O. Lloyd Blankfein

Deutsche Bank 2nd-Quarter Results Top Estimates ‘Considerably’

ZTE Stock Surges as U.S. Supplier Ban Lifted Though Outlook Remains Uncertain

Amazon’s Curious Case of the $2,630.52 Used Paperback

Papa John’s Further Shuns Founder, Evicting Him From Offices

Michael Batnick: The Bottom and The Top

Jeff Carter: Market Segmentation Works

Howard Lindzon: Nasdaq 10,000 – India and China…The Next Billion

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Smucker Raises Dividend by 9%
Posted by Eddy Elfenbein on July 13th, 2018 at 7:13 pm

After the bell, Smucker (SJM) announced that they’re raising their dividend from 78 to 85 cents per share. The new dividend will be paid on Tuesday, September 4 to shareholders of record at the close of business on August 17. This is SJM’s 17th straight annual dividend increase.

Check Point CEO on Safeguarding the Midterm Elections
Posted by Eddy Elfenbein on July 13th, 2018 at 10:29 am

CWS Market Review – July 13, 2018
Posted by Eddy Elfenbein on July 13th, 2018 at 7:08 am

“Intelligent investment is more a matter of mental approach than it is of technique.”
– Ben Graham

On Thursday, the S&P 500 closed at its highest level since February 1. The Nasdaq Composite did even better, closing at an all-time high. Our Buy List is no slouch, either. Since May 31, the Buy List is up 5.8% which is well ahead of the broader market. Buy List stocks like Moody’s (MCO), Fiserv (FISV) and Church & Dwight (CHD) are at new highs.

What’s the reason for Wall Street’s happy mood? This really isn’t a case of good things happening. Instead, it’s the ebbing of the fear that bad things were coming (more specifically, the U.S. engaging in a protracted trade war with the world, especially China).

In this week’s issue, we’ll take a closer look at the trade news impacting Wall Street. I’ll also preview our Buy List earnings reports coming next week. Second-quarter earnings season is starting now. Get ready because we’re soon going to have a lot of earnings news.

The Jobs Machine Churns On

Here’s an interesting stat on our Buy List: In 15 of the last 16 trading sessions, the daily swing in our Buy List has been less pronounced than that of the overall market. In other words, on up days, we’re less up. On down days, we’re less down. In fact, we’ve been much less down.

In technical terms, this means that our portfolio has a low “beta.” Typically, our beta is low, but it’s been unusually low recently. The reason is that Wall Street is swinging back and forth between two possible outlooks for trade. On some days, it looks good for trade. Then on other days, it doesn’t look so good.

The key is that our portfolio isn’t so wedded to these competing outlooks. We aim for high-quality stocks that prosper no matter what the environment. As a result, we’ve been sidestepping the trade-related swings of late. Think of the market as a boat that’s rocking in the waves. Our Buy List is nestled near the center of the boat, but lots of investors are perched at either side, getting soundly tossed about each day.

The S&P 500 has rallied eight times in the last ten days. Last Friday, China and the U.S. imposed tariffs on each other. I think some investors thought that the world would implode. Well, it didn’t happen. It’s as if there’s a sudden realization that life will go on.

The trade news is bad, but it’s not that bad. The economy will motor on. Later today, some of the big banks will report Q2 earnings. I think we’ll see good results. In fact, the banking sector was especially strong on Thursday. For Q2, corporate profits probably rose more than 20%.

Last Friday, the government released the jobs report for June, and the numbers were pretty good. The U.S. economy created 213,000 net new jobs last month. The unemployment rate ticked up from 3.8% to 4.0%. I dug into the decimals and the increase was closer to 0.3%. That’s the largest monthly increase in the unemployment rate since November 2010.

A big uptick in unemployment is a pretty good indicator of a recession, but I doubt it in this case. The reason is more workers joining the labor pool. That creates the oxymoron of more jobs leading to a higher unemployment rate. After nine years of economic expansion, the jobs-to-population ratio isn’t that high. In fact, the ratio is currently lower than it was at any point from 1987 to 2008.

But with good jobs news, we got some concerns about inflation. On Thursday, the government released the latest inflation figures for June. Consumer prices rose by just 0.1%. What’s notable is that in the past year, inflation is up by 2.87%. That’s the fastest rate since January 2012.

I also like to look at the “core rate” which excludes food and energy prices. In June, core inflation rose by 0.2%. The year-over-year increase is 2.26%, but that’s up by 0.54% since November. In other words, inflation has effectively erased two of the Fed’s rate hikes in the last few months.

To sum up, this is a very good time to be an investor. The trouble spots are still a way off. Continue to focus on high-quality stocks like you’ll see on our Buy List. Don’t let a bad reaction to an earnings report faze you. Traders are fickle. So often, our best stocks drop the day after earnings but rally back later on. We also want to pay attention to stocks that reaffirm or increase their guidance. Now let’s look at our first batch of Q2 earnings reports.

Second-Quarter Earnings Calendar

Over the next few weeks, 21 of our 25 Buy List stocks will report their earnings. I don’t have all the earnings dates just yet, but here’s a preliminary list of each stock, the earnings date and Wall Street’s estimate.

On Thursday, four of our Buy List stocks are due to report: Alliance Data Systems, Danaher, RPM International and Snap-on.

I’m most curious about Alliance Data Systems (ADS). The loyalty-rewards company has staged a furious turnaround for us. Three months ago, Alliance reported Q1 core earnings of $4.44 per share. That easily topped Wall Street’s estimate of $4.23 per share, however, the estimate had been severely pared back going into the earnings report. Not long before, Wall Street had been expecting over $5.10 per share for Q1.

Regarding Q1, Alliance’s CEO said, “This quarter’s pro-forma revenue growth of 4 percent and core EPS growth of 13 percent should reflect our softest quarter of the year. Specifically, higher reserve levels required to cover the transitory impacts of the internal recovery investment was an approximate $0.60 hit to core EPS for the first quarter. Moving forward, recovery rates should move in our favor.”

ADS reiterated its full-year guidance of $22.50 to $23 per share with revenue of $8.35 billion. If those numbers are right, then ADS is going for a decent valuation. For Q2, Wall Street expects earnings of $4.67 per share.

Danaher (DHR) had a very good report for Q1. The company made 99 cents per share. Initially, the company provided Q1 guidance of 90 to 93 cents per share. They followed that up by saying that thanks to strong results from their Life Sciences and Diagnostics platforms, “specifically at Cepheid,” they’ll beat their guidance. They were right.

For Q2, Danaher sees earnings of $1.07 to $1.10 per share. In April, the company raised its full-year guidance. The old range was $4.25 to $4.35 per share. The current range is $4.38 to $4.45. In 2017, DHR made $4.03 per share.

RPM International (RPM) is usually one of our quietEst stocks, but it’s been making a lot of noise lately. Since April 2, shares of RPM are up nearly 30%. The recent spark came when the company said they reached an agreement with Elliott Management.

According to the agreement, RPM will add two new board members. The board will also form an Operating Improvement Committee. The OIC will “focus on operational and financial initiatives to create and enhance shareholder value. Certain of these initiatives will center around setting and achieving new company margin targets based on top-performing industry standards and optimization of RPM’s balance sheet, including streamlining working capital and implementing new capital allocation guidelines and capital return plans.”

The idea is that RPM will be more transparent regarding its financial goals. They’ll provide an update for shareholders by November 30. Traders approved the deal. The stock jumped 9% on the Elliott news.

I should mention that RPM is an off-cycle stock. Their fiscal Q4 ended in May.
For Q4, they expect consolidated revenue growth in the “mid-to-upper” single digits. In April, RPM narrowed its full-year guidance from $3 – $3.10 per share to $3.05 – $3.10 per share. This is a good company going for a good valuation. Let’s also remember that RPM has raised its dividend for the last 44 years in a row. That’s a nice streak.

Snap-on (SNA) was our surprise winner last earnings season. The company reported Q1 earnings of $2.79 per share, seven cents more than estimates. The shares jumped more than 6% that day.

Lately, I’ve been concerned by weakness in Snap-on’s tool group. Fortunately, their other business units are picking up the slack. Wall Street currently expects Q2 earnings of $2.95 per share.

I’m also going to include Signature Bank (SBNY). Officially, the bank hasn’t said yet when they’ll report earnings, but they usually report early. I’m guessing it will report on Thursday. The stock just dipped down to an eight-month low. The New York-based bank took a massive charge during Q1 for its medallion loans. The other headwind SBNY is facing is the narrowing yield curve. Wall Street expects Q2 earnings of $2.81 per share.

Ingredion (INGR) won’t report until August 2, but after the bell on Thursday, the company warned that its Q2 results will be between $1.63 and $1.68 per share. Wall Street had been expecting $1.92 per share. They also lowered their full-year guidance from $7.90 to $8.20 per share, down to $7.50 to $7.80 per share. That’s the second time they’ve lowered guidance this year. Ingredion also announced an aggressive cost-cutting program. That usually makes me suspicious. A good company should always be looking to cut costs. I’m not pleased with Ingredion. I’m dropping my Buy Below price to $100.

That’s all for now. Earnings season will start to heat up next week. We’ll also get some key economic reports. The retail sales report comes out on Monday. Then on Tuesday, we’ll get a look at industrial production. The data series has improved over the last two years. Then on Wednesday, the housing starts report comes out. Also, Fed Chairman Jerome Powell will deliver his semiannual Congressional testimony on Tuesday and Wednesday. 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

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Morning News: July 13, 2018
Posted by Eddy Elfenbein on July 13th, 2018 at 7:06 am

Trade War With China in Aisle 12

Inflation Hits 6-Year High, Wiping Out Wage Gains for the Average American

Fed’s Powell Says the U.S. Economy in ‘Good Place’ But Trade Is a Risk

Commerce Secretary Ross to Sell All Stocks After Ethics Office Warning

AT&T Appeal Seen as High-Stakes Shot at Redemption for Enforcers

The Disney-Comcast Fight Switches to Sky

Broadcom Loses $19 Billion in Market Value After Bid to Buy CA

Starbucks’ Plastic Straw Ban Is More Important Than You Think

Fast-Food Chains Back Away From Limits On Whom They Hire

Gogo’s Revamp Means Airlines Must Pay More For Wi-Fi

There Will Only Be 1 Blockbuster in America Soon

Johnson & Johnson Told to Pay $4.7 Billion in Talcum Powder Case

Ben Carlson: Concentration in the Stock Market

Cullen Roche: Inflation Update – Still Not Flatin’ Too Much

Blue Harbinger: What Motivates Traders To Trade?

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