Morning News: March 26, 2018
Posted by Eddy Elfenbein on March 26th, 2018 at 6:52 am

China’s Oil Futures Soar on Debut

U.S. Stock Futures Start Week With a Reprieve

As Trade War Heats Up, Biggest Currency Whales Make Their Move

It May Pay to Fight IRS Penalties

Mark Zuckerberg Apologizes For Facebook Privacy Scandal in Full-Page Newspaper Ads

As Amazon Steps Up Tax Collections, Some Cities Are Left Out

Uber Is Giving Up on Southeast Asia

Smurfit Rejects Fresh $11 Billion International Paper Bid

Gun Maker Remington Seeks Bankruptcy Protection

JPMorgan Brings Amazon’s Alexa to Wall Street Trading Floors

Apple Goes to Hollywood. Will Its Story Have a Happy Ending?

Battered by Great Recession, Underfunded Public Pensions to Persist

Jeff Miller: Can a Trade War Be Avoided?

Joshua Brown: Strategy

Ben Carlson: On The One Hand…

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CWS Market Review – March 23, 2018
Posted by Eddy Elfenbein on March 23rd, 2018 at 7:08 am

“There are two kinds of people who lose money: those who know nothing, and those who know everything.” – Henry Kaufman

The stock market took a big bath on Thursday. At 2 p.m., the Dow was down about 250 points, but after that, things got really bad. By the closing bell, the Dow had lost 724.42 points. The S&P 500 closed at 2,643.69 which is its lowest level in six weeks.

On Monday, I was on CNBC’s “Closing Bell.” I got a chance to expand on an important point I made in last week’s issue. The recent attack on free trade, combined with the defenestration of Facebook and the blocking of some high-profile mergers, aren’t disparate events. Rather, these are part of a single trend which is a fundamental change to the economic order that has prevailed since the end of the Cold War.

I think the effect of this is starting to spook Wall Street. Free trade and market liberalization simply don’t hold the clout they used to. I’m not saying this is right or wrong, but it is something profound that’s taking place, and investors need to understand the change.

In this week’s CWS Market Review, I’ll explain what I mean. I’ll also look at this week’s Fed meeting. For the sixth time this cycle, the Fed decided to raise interest rates. Real rates are all the way up to nearly 0%. Before we get to that, let’s look at this week’s paroxysm.

Tariffs Slam Wall Street

On Monday, the S&P 500 dropped 1.42% for its worst day in several weeks. What’s interesting about Monday’s market action is that our Buy List largely sidestepped the damage. The big loser of the day was Facebook while several other social media stocks felt the heat. However, our Buy List lost -0.74%. A single day’s outperformance of 68 basis points is quite good. More importantly, it highlights a growing gap between overvalued “story” stocks and the high-quality ones we favor.

The riskier sectors of the market are very fragile. Consider that the S&P 500 Tech Sector has underperformed for the last five days in a row. I don’t think this will stop. I have to stress how distorted the market has become. On Monday, nearly two-thirds of the stocks in the S&P 500 managed to outperform the index. That shows the huge impact of a small group of very large stocks.

None of this is being helped by the Trump administration’s tariff policy. On Thursday, the Trump administration said it will impose stiff tariffs on Chinese imports. The goal is to narrow our trade deficit with China. The president has said that the tariffs could be as much as $60 billion.

The administration had previously announced tariffs on steel and aluminum. Those will go into effect today. On Thursday, metal stocks were very big losers. US Steel lost 11% in the day’s trading. Fortunately, we don’t have any steel, copper or aluminum stocks on our Buy List, so we’re safe there.

Unfortunately, we do have a few cyclical stocks like Signature Bank (SBNY), Sherwin-Williams (SHW) and Wabtec (WAB), and those got dinged on Thursday. The inflated areas of the market still look quite risky, and this includes many tech names.

This week, the Justice Department urged a judge to block the merger between AT&T and Time-Warner. As with political matters, I won’t say if this is good or bad, but it will make other companies think twice before planning a big merger. This also comes on the heels of the dissolution of the Broadcom/Qualcomm merger. Not that long ago, no one would have batted an eye at these mergers. Not so any more.

Let me highlight a few bargains on our Buy List. Alliance Data Systems (ADS) has been sinking like a stone. The stock is currently going for less than 10 times its projected earnings for this year. My Buy Below on ADS is currently $252, but if you can get it below $225, you’ve gotten a good deal. Carriage Services (CSV) also looks good here. The shares are going for less than 14 times forward earnings. Finally, let me put in a kind word for Check Point Software (CHKP). The cybersecurity stock is attractive below $105 per share.

For the Sixth Time this Cycle, the Fed Hikes Interest Rates

On Wednesday, the Federal Reserve decided to raise interest rates. Their target for the Fed funds rate is now 1.50% to 1.75%. Adjusted for inflation, that’s still negative, but only by a little bit. This latest increase wasn’t exactly a surprise; it was widely expected on Wall Street. This is the Fed’s sixth rate increase of this cycle.

What makes this latest policy statement interesting is that the Fed sounded more upbeat on the economy. Specifically, the Fed said, “the labor market has continued to strengthen and that economic activity has been rising at a moderate rate.” Unfortunately, wage gains have been pretty mediocre, but at least they’re rising. The good news is that inflation continues to be contained although there have been some hints that the rate of inflation may be accelerating.

This Fed meeting was also noteworthy because it’s the first one with Jay Powell as chairman. This week’s meeting was followed by a press conference with Chairman Powell. I’ll give him points for being far more direct than either Yellen or Bernanke. Powell is a lawyer by training whereas the two former Fed chairs are professors. Academics, especially those in Econ, love to hedge their answers. Alan Greenspan once said, “I guess I should warn you, if I turn out to be particularly clear, you’ve probably misunderstood what I’ve said.” We won’t be hearing that from Powell. Interestingly, Powell’s press conference was also the shortest post-meeting conference on record.

With this meeting, the Fed also released its economic projections for the next few years. I’ll caution you that the Fed isn’t very good at predicting things. Still, their outlook is influential. The Fed sees the economy growing, in real terms, by 2.7% this year and 2.4% next year. That’s an increase from their December forecast which saw the economy rising by 2.5% this year and 2.1% in 2019. I suspect that’s probably due to tax reform.

Here’s a look at the inflation adjusted Fed funds rate:

The Fed sees the unemployment rate dropping from the current level of 4.1% to 3.9% by the end of this year and then to 3.6% (!) by the end of next year. If the Fed is right on this last point, then it would be the lowest unemployment rate since the 1960s. Despite the brighter outlook, the Fed kept its inflation outlook basically unchanged. In other words, the Fed sees itself as handling the economy brilliantly over the next few years.

Now here’s where it gets interesting. The Fed is almost evenly split on the outlook for rate hikes for this year. Eight FOMC members think we’ll need no more than two hikes this year while seven think we’ll need at last three more. The futures market sees another hike coming in June, then another in September, and that’s it for this year.

After that, the median FOMC voters see two more hikes in 2019. If that’s right, then it would mean we’ll finally hit the “neutral rate” 21 months from now. To boil it all down, we’re still a long way from a recession.

The three best indicators for looking at a recession are initial jobless claims, the real Fed funds rate and the yield curve. Initial jobless claims are still very low. The real Fed Funds rate is higher but still below neutral. The yield curve has narrowed, but it’s still positive. The bottom line is that there’s no imminent worry of a recession.

FactSet’s Earnings Preview

FactSet Research Systems (FDS) is due to report Q2 on Tuesday, March 27. The company is a data provider for the investment community. That’s a surprisingly profitable business. Three months ago, FDS reported Q1 earnings of $2.04 per share. That was six cents better than Wall Street’s consensus. The downside is that their revenue came in a little light. Wall Street had been expecting $331.2 million. Instead, it was only $329.1 million.

The poor revenue news caused the stock to take a tumble. The lower share price helped convince me that it was a good opportunity to add it to our Buy List. I’m glad we did. FDS has been a nice winner for us this year (except for on Thursday).

The good news in the Q1 report is that FactSet said they expect full-year earnings to range between $8.25 and $8.45 per share, on revenue of $1.34 to $1.36 billion. For Q2, Wall Street expects earnings of $2.06 per share. I think that’s a bit too low. I’m expecting something between $2.08 and $2.11 per share, but I won’t be too concerned if I’m off by a few pennies.

One factor I’ll be watching is FactSet’s operating margin. More often than not, a healthy operating margin is the hallmark of a strong company. For Q1, FactSet’s adjusted operating margin dropped to 31.7% from 33.0% in the Q1 one year prior. The company blamed the lower margin on restructuring costs. I hope to see this metric stabilize.

FactSet is currently trading above our $202 Buy Below price. I want to see the earnings report before I decide to adjust our Buy Below price.

Buy List Updates

Two of our Buy List stocks split 2-for-1 this week. On Monday, AFLAC (AFL) split 2-for-1. This means shareholders got twice as many shares, and the share price roughly fell by half. Then on Tuesday, it was Fiserv’s (FISV) turn to split. Technically, the split goes into effect on the trading day before, as the new shares are distributed after the close.

For tracking purposes, I assume the Buy List is a $1 million portfolio that’s equally weighted at the start of the year. For AFLAC, I’m adjusting our starting price to $43.89 per share. Also, the number of shares will double from 455.6847 to 911.3694. For Fiserv, I’m adjusting the starting price to $65.565 per share and the number of shares doubles to 610.0816.

Our Buy Below prices for both stocks split as well. AFLAC is now a buy up to $47 per share, and Fiserv is a buy up to $72 per share.

On Wednesday, shares of General Mills got hit hard after a lousy earnings report. The problem for us is that took down shares of Smucker (SJM) and Hormel Foods (HRL). This is typical Wall Street thinking. They assume that if one company in a sector is having issues, then they all are. In this case, that’s simply not true with either stock. A few weeks ago, Hormel met earnings and raised guidance and their dividend. It was Hormel’s 52nd consecutive annual dividend increase. Also, Smucker beat earnings and raised guidance.

That’s all for now. Next week is the final trading week of the first quarter. The stock market will be closed on March 30 for Good Friday. This is the one day of the year when the market is closed but most businesses are open. The biggest report will be the final revision to Q4 GDP. That’s due out on Wednesday. Then on Thursday, we’ll get the reports on personal income and spending for February. 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

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Buy This 17% High-Yield Stock Selling at a Temporary Discount

Last week a Federal Energy Regulatory Commission (FERC) ruling sent the MLP and energy infrastructure stocks into a tailspin. The news release caused an immediate 10% drop in the MLP indexes. Prices recovered to close at a 5% decline. A closer read of the facts shows the fears were overblown and this steep drop may end up in hindsight as the MLP sector’s equivalent of the March 2009 bottom of the last stock bear market.

Here is the scary headline from Bloomberg:

Pipeline Stocks Plunge After FERC Kills Key Income-Tax Allowance

The reality is that the ruling only applies to interstate (not intrastate, which is most pipeline miles) pipelines and to just one of the methods a pipeline company can use to set interstate transport rates.

In the bigger picture, MLP values have been falling since late January. Over the same period companies in the sector reported 2017 fourth quarter results that were very positive. MLP fundamentals have been improving for several quarters, and the trend will continue as North American oil and gas production continues to grow.

If you own quality MLPs that have fallen in value, it is a good time to add more to your positions. In my Dividend Hunter newsletter, my primary MLP recommendation is the InfraCap MLP ETF (NYSE: AMZA). This ETF pays monthly dividends which benefit from option selling by the fund managers. After the big FERC fueled drop, AMZA yields over 17%. See here to find out more.

Dump These 3 Steel Stocks as Tariff’s Rip Up the Industry

The imposition of a 25% tariff on imported steel by President Trump has certainly been a headline grabber. But it obscures the long-term problems faced by the U.S. steel industry.

And it only addresses one side of the classic economic equation for any commodity – supply and the industry’s struggle against cheap imports. The share of the U.S. steel market taken by imports was only 26.9% in 2017, up slightly from 2016’s level of 25.4%.

I expect the benefits of the tariffs to the steel companies to disappear as quickly as a morning fog on a hot summer day.

This makes the stocks of the steel companies un-investable or, if you have a high risk tolerance, outright shorts. Especially at these elevated price levels, which seemed to have all the possible good news already factored in. That’s why you should sell these three steel stocks without delay.

Morning News: March 23, 2018
Posted by Eddy Elfenbein on March 23rd, 2018 at 7:03 am

China Hits Back on Trump Tariffs as Europe Off the Hook for Now

European and Asian Shares Fall Amid Fears of US-China Trade War

Tencent’s Two-Day Selloff Wipes Out $52 Billion in Market Value

Europe’s Tax War on U.S. Tech

AT&T Would Use Time Warner as a `Weapon,’ Justice Dept. Says

Powell Disses Dots Again as He Stresses Limit of Fed’s Knowledge

Silicon Valley Played By a Different Set of Rules. Facebook’s Crisis Could Put an End to That.

Dropbox Closes Gap to Private Value With Above-Range IPO Pricing

Glaxo Surges After Withdrawing Bid for Pfizer Consumer-Health Unit

Micron Bets That Memory Demand is Here to Stay

As Toshiba’s $18 Billion Chip Unit Sale Faces Tight Deadline, IPO Looms

Elon Musk Is the Henry Ford of His Age. That’s Bad.

Michael Batnick: A Not So Pretty Picture

Cullen Roche: 3 Tips to Avoid the Active vs Passive Trap

Mark Hines: How Long Was Your Learning Curve?

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Morning News: March 22, 2018
Posted by Eddy Elfenbein on March 22nd, 2018 at 7:04 am

Europe Plants a Flag in the Digital-Tax Debate

One of Europe’s Biggest Funds Is Betting on the Dollar

Trump to Announce $50 Billion in China Tariffs

China: We Will Hit Back if US Announces New Tariffs

Fed Raises Rates and Signals Faster Pace in Coming Years

Facebook and Zuckerberg Still Don’t Know The Right Thing To Do

Antitrust Case Against Merger of AT&T and Time Warner Feels Stuck in the Past

Porsche Says New High-Performance Mission E Electric Car Is Not A “Tesla Model S Hunter”

Google’s E-Commerce Rivalry With Amazon Just Got More Serious

Whole Foods Is Losing Executives Under New Owner Amazon

Naspers to Sell $10.6 Billion of Tencent to Fund Investments

Meredith Says It Intends to Sell Time, Sports Illustrated, Fortune and Money

Roger Nusbaum: There’s an ETF For That

Howard Lindzon: Mark Zuckerberg Throws Technology Under The Bus

Jeff Carter: If Your Industry Skirts With Government Norms, You Need to Be in DC

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Today’s Fed Policy Statement
Posted by Eddy Elfenbein on March 21st, 2018 at 2:01 pm

The Fed raised rates by 0.25%. The new range for Fed funds is 1.50% to 1.75%.

Information received since the Federal Open Market Committee met in January indicates that the labor market has continued to strengthen and that economic activity has been rising at a moderate rate. Job gains have been strong in recent months, and the unemployment rate has stayed low. Recent data suggest that growth rates of household spending and business fixed investment have moderated from their strong fourth-quarter readings. On a 12-month basis, both overall inflation and inflation for items other than food and energy have continued to run below 2 percent. Market-based measures of inflation compensation have increased in recent months but remain low; survey-based measures of longer-term inflation expectations are little changed, on balance.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The economic outlook has strengthened in recent months. The Committee expects that, with further gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace in the medium term and labor market conditions will remain strong. Inflation on a 12-month basis is expected to move up in coming months and to stabilize around the Committee’s 2 percent objective over the medium term. Near-term risks to the economic outlook appear roughly balanced, but the Committee is monitoring inflation developments closely.

In view of realized and expected labor market conditions and inflation, the Committee decided to raise the target range for the federal funds rate to 1-1/2 to 1-3/4 percent. The stance of monetary policy remains accommodative, thereby supporting strong labor market conditions and a sustained return to 2 percent inflation.

In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The Committee will carefully monitor actual and expected inflation developments relative to its symmetric inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant further gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.

Voting for the FOMC monetary policy action were Jerome H. Powell, Chairman; William C. Dudley, Vice Chairman; Thomas I. Barkin; Raphael W. Bostic; Lael Brainard; Loretta J. Mester; Randal K. Quarles; and John C. Williams

Here are the new economic projections.

For the rest of this year, six FOMC members see two more hikes while another six see three more hikes. Two members see no increases while one sees four more increases this year.

The median Fed voter sees two more hikes this year, plus another three next year, plus two more in 2020.

Bad Day for Packaged Goods
Posted by Eddy Elfenbein on March 21st, 2018 at 12:53 pm

General Mills (GIS) is getting clocked today thanks to a lousy earnings report. GIS is the worst performing stock today in the entire S&P 500.

The problem for us is that this is bringing down two of our stocks, Hormel Foods (HRL) and Smucker (SJM). Wall Street assumes that if one company in a sector is having problems, then they all must be. SJM is currently down 4.3% while HRL is off by 2.3%.

Both companies are still doing well. A few weeks ago, Hormel met earnings and raised both their guidance and their dividend. That was their 52nd annual dividend increase. Smucker beat earnings and raised guidance.

Morning News: March 21, 2018
Posted by Eddy Elfenbein on March 21st, 2018 at 7:05 am

China Newspaper Calls for Curbs Against U.S. Soybean ‘Dumping’

Fed Set to Raise Rates, Issue New Economic Projections

How Trump’s Protectionism Backfires

Facebook’s Lax Data Policies Led to Cambridge Analytica Crisis

The End for Facebook’s Security Evangelist

We Fear What We Can’t Control About Uber and Facebook

Amazon is Now Second Most Valuable U.S.-Listed Company, Tops Alphabet

Google Is Creating Its Own Amazon Right Under Our Noses

Salesforce Buys MuleSoft for $6.5 Billion in Expansion Quest

China Pushes Qualcomm to Protect Local Companies in NXP Deal

Bayer Wins EU Approval for $62.5 Billion Monsanto Buy

Toyota to Temporarily Halt Driverless-Car Testing in U.S.

Michael Batnick: The Easy Pickings

Ben Carlson: This Year’s Stock Market Losses Are Normal

Joshua Brown: Some Alternatives to Evidence-Based Investing & The Real Reformed Broker

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Now It’s Fiserv’s Turn to Split
Posted by Eddy Elfenbein on March 20th, 2018 at 9:57 am

This morning, Fiserv (FISV) split 2-for-1. Our Buy Below price drops to $72 per share share. In our tracking portfolio, I’m adjusting the starting price to $65.565 per share. The number of shares doubles to 610.0816.

Morning News: March 20, 2018
Posted by Eddy Elfenbein on March 20th, 2018 at 7:05 am

U.K. Inflation Slows More Than Expected as Pound Shock Fades

U.S. Plans Heavy China Tariff Hit as Soon as This Week

The Fed Is Signaling More Than 3 Rate Hikes This Year

Four Charts That Show the Tech-Stock Tumble May Not Last Long

Crash Marks 1st Death Involving Fully Autonomous Vehicle

Alex Stamos, Facebook Data Security Chief, To Leave Amid Outcry

Here’s What Wall Street Analysts Are Saying About Facebook’s Data Scandal

Facebook’s Content Issues Are Creating a ‘Tailwind’ For Amazon’s Ad Business

Weinstein Co. Files for Chapter 11 Bankruptcy

Why More Than Just the AT&T-Time Warner Deal Is on Trial

Apple and IBM Unveil Artificial Intelligence Service That Coca-Cola Is Testing

VW Plans $340 Million Expansion at Tennessee Plant

Cullen Roche: Why Are Money Managers Paid So Much?

Howard Lindzon: Momentum Monday…Will Facebook’s Faceplant Carry Over?

Roger Nusbaum: March Magic

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S&P 500 Plunges -1.42%
Posted by Eddy Elfenbein on March 19th, 2018 at 5:44 pm

Today was a rough day for Wall Street. The S&P 500 lost -1.42%. That’s it’s biggest drop since February 8. In the Dow, only Boeing was up. The 29 others were down.

Today was particularly hard for tech. The tech sector lost 2.19%. Facebook was the big loser with a loss of close to 7%. The defensive sectors fared much better. In fact, in terms of relative strength, this was an outstanding day for our Buy List. We beat the S&P 500 by 68 basis points today. Hormel, Smucker, C&D, Ross Stores, ADS and Carriage were up for the day.

Today was a classic countertrend day. A lot of the high-beta, high volatility names that had been doing well got hit hard. On the other side, many of the lagging names did OK.