The Fed’s Policy Statement
Posted by Eddy Elfenbein on September 20th, 2017 at 2:07 pm

Hot off the presses: While the FOMC decided against raising rates this time, they seem on course for a December rate hike. I think that would be a big mistake.

Information received since the Federal Open Market Committee met in July indicates that the labor market has continued to strengthen and that economic activity has been rising moderately so far this year. Job gains have remained solid in recent months, and the unemployment rate has stayed low. Household spending has been expanding at a moderate rate, and growth in business fixed investment has picked up in recent quarters. On a 12-month basis, overall inflation and the measure excluding food and energy prices have declined this year and are running below 2 percent. Market-based measures of inflation compensation 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. Hurricanes Harvey, Irma, and Maria have devastated many communities, inflicting severe hardship. Storm-related disruptions and rebuilding will affect economic activity in the near term, but past experience suggests that the storms are unlikely to materially alter the course of the national economy over the medium term. Consequently, the Committee continues to expect that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace, and labor market conditions will strengthen somewhat further. Higher prices for gasoline and some other items in the aftermath of the hurricanes will likely boost inflation temporarily; apart from that effect, inflation on a 12-month basis is expected to remain somewhat below 2 percent in the near term but 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 maintain the target range for the federal funds rate at 1 to 1-1/4 percent. The stance of monetary policy remains accommodative, thereby supporting some further strengthening in 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 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.

In October, the Committee will initiate the balance sheet normalization program described in the June 2017 Addendum to the Committee’s Policy Normalization Principles and Plans.

Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; Charles L. Evans; Stanley Fischer; Patrick Harker; Robert S. Kaplan; Neel Kashkari; and Jerome H. Powell.

Here are the latest projections (aka “the blue dots”).

According to the projections, the Fed sees one more rate hike this year, three more next year, two more in 2019 and a final one in 2020.

Morning News: September 20, 2017
Posted by Eddy Elfenbein on September 20th, 2017 at 7:08 am

Fed to Pack Up Crisis Tool, Debate Next Hike: Decision-Day Guide

Bitcoin Price Hits $4,000 Even as Ray Dalio Calls it a ‘Bubble’

Equifax May Be Happy to Spend $1 Per Customer for Their Trouble

Toys ‘R’ Us Will Live Because Mattel and Hasbro Can’t Let It Die

SoftBank CEO Says T-Mobile-Sprint Deal Will Lift Competition

Amazon’s Next Act Takes Place in the Real World

Toshiba Selects Bain Group as Buyer of its Prized Chip Business

Chipotle: Melted Cheese Might Not Save Growth Woes

Bed Bath & Beyond Craters 15% After Big Miss on Earnings Partly Blamed on Hurricane Harvey

Proterra Counters Tesla’s ‘Beast’ Of A Semi With 1,100-Mile-Range Electric Bus

Before Wisconsin, Foxconn Vowed Big Spending in Brazil. Few Jobs Have Come.

Airbus Opens China A330 Plant Amid Market Push

Ben Carlson: Social Proof in the Markets

Michael Batnick: These Are The Goods

Josh Brown: Okay, So My Favorite Band Got Discovered

Be sure to follow me on Twitter.

Microsoft Raises Dividend by 7.6%
Posted by Eddy Elfenbein on September 19th, 2017 at 5:34 pm

Microsoft (MSFT) just announced a 7.6% increase to their quarterly dividend. The payout will rise from 39 to 42 cents per share. The dividend is payable December 14 to shareholders of record on November 16. The ex-dividend date will be November 15.

Based on today’s close, MSFT yield 2.23% which is just one basis point below the 10-year Treasury.

Morning News: September 19, 2017
Posted by Eddy Elfenbein on September 19th, 2017 at 7:04 am

Mexico Readies Bill to Regulate Fast-Growing Fintech Industry

The World’s Biggest Wealth Fund Hits $1 Trillion

The IMF Needs to Stop Torturing Greece

Bond Investors Rationalize the Unrealistic

Jamie Dimon, Here’s Why You’re Wrong About Bitcoin

Equfax Suffered Another Data Breach in March

Toys ‘R’ Us Files for Bankruptcy but Keeps Stores Open

Adidas Overtakes Jordan on List of Top U.S. Sport Footwear

Roku Just Doubled Its IPO Forecast to $252 Million

Fixing the `Brain Damage’ Caused by the IPO Process

Ocado Reports Strong Growth, But Short Term Costs Hurt Shares

Activist Lifts Clariant Stake, Aiming to Scuttle Huntsman Deal

Howard Lindzon: All is Fair in Love and War…and Markets

Roger Nusbaum: James Altucher Is Right, Retirees Shouldn’t Own a Home

Jeff Carter: mHub Pitch Competition

Be sure to follow me on Twitter.

Disappointing Economic News
Posted by Eddy Elfenbein on September 18th, 2017 at 10:50 am

The Federal Reserve gets together again tomorrow. I doubt we’ll see any moves on the interest rates front, but we may get some hints of things to come. The futures market appears to be leaning towards a December rate hike. I don’t think that’s a good idea.

We’re not near a recession, but the economy is hardly sprinting either. On Friday, we got some disappointing economic news. The Fed said that industrial production fell 0.9% in August. Hurricane Harvey was responsible for an estimated 0.75% of that. Also, retail sales dropped 0.4% last month. Excluding gasoline, retail sales were down 0.2% in August.

The Atlanta Fed’s GDP model now sees Q3 coming in at 2.2%. The New York Fed’s model is down to 1.3%. Harvey bears some of the blame, but not all.

Ingredion Raises Dividend by 20%
Posted by Eddy Elfenbein on September 18th, 2017 at 10:01 am

Good news for Ingredion (INGR) investors. On Friday, the company announced a 20% increase to its dividend. The quarterly payout will rise from 50 to 60 cents per share. Based on Friday’s closing price, the new dividend yields 1.92%.

“We are proud of our record of delivering consistent shareholder value. From dividends and share repurchases to capital investments and acquisitions, we are committed to a balanced deployment of cash consistent with our strategic blueprint,” said Ilene Gordon, chairman, president and CEO.

The new dividend is payable on October 25 to stockholders of record at the close of business on October 2.

On Monday, Ingredion said that James Zallie will become their new CEO on January 1. He’ll replace Ilene Gordon who will stay on as chairman until July 2018.

Fed hike around the corner?
Posted by Eddy Elfenbein on September 18th, 2017 at 9:37 am

Morning News: September 18, 2017
Posted by Eddy Elfenbein on September 18th, 2017 at 6:54 am

Superpower India to Replace China as Growth Engine

China Expresses Concern Over EU Push to Curb Foreign Takeovers

Yellen Legacy Burnished by Job Market Hunch, Crisis Policy Exit

Cuomo Proposes Stricter Regulations for Credit Reporting Agencies

Wall Street’s Trillion-Dollar Monopoly Has Repo Traders on Edge

Northrop Grumman Nears Deal to Purchase Orbital ATK

Walgreens Said to Tweak Rite Aid Deal to Clinch U.S. Approval

Slack Gets Slice of SoftBank’s $100 Billion Tech Bounty

Facebook Navigates an Internet Fractured by Governmental Controls

Hiscox Sees $150 Million Net Claims from Hurricane Harvey

Rolling Stone, Once a Counterculture Bible, Will Be Put Up For Sale

UBS: ‘Headwinds Could Persist’ for Wells Fargo After the Fake Account Scandal Killed Its Stock Last Year

Jeff Miller: Will a More Aggressive Fed Spark the Long-Awaited Correction?

Ben Carlson: How Millennials Can Prepare For the Next Financial Crisis

Michael Batnick: These Are The Goods

Be sure to follow me on Twitter.

GE is Dow’s biggest laggard
Posted by Eddy Elfenbein on September 15th, 2017 at 4:13 pm

CWS Market Review – September 15, 2017
Posted by Eddy Elfenbein on September 15th, 2017 at 7:08 am

“Fear is an emotion, not a stock indicator.” – Coreen T. Sol

After eight and a half years, the stock market is still hitting fresh all-time highs. The Dow, S&P 500 and Nasdaq all broke out to new highs this week. Here’s a cool stat: since the election, the S&P 500 has added $2 trillion in market value, and half of that is due solely to the tech sector. The much-hated rally marches ever onward.

The S&P 500 even came close to breaking through 2,500 for the first time in its history. Thursday’s intra-day high was 2,498.43. For some context, the S&P 500 first broke 25 in 1929, and it smashed 250 in 1986.

The historically-minded observer may have noticed that those milestones came just before some unpleasantness. I still think we’re pretty safe from any nasty downturns. Inflation, interest rates and unemployment are low, and the economy continues to hum along.

In this week’s CWS Market Review, I want to focus on a key aspect that’s been helping the market this year: the weak U.S. dollar. This is a crucial factor, and it’s not widely understood. The currency markets can have a big impact on the stock market, and I want to explain what’s happening. Later on, I’ll update you on some of our Buy List stocks. Cerner became our first stock to be up 50% for this year. I hope there will be more. Before we get to that, though, let’s see why the falling greenback has been our secret helper this year.

The Weak-Dollar Rally

The U.S. dollar has not been in a good way this year, and that’s actually a good thing. Look at some of the numbers. Earlier this year, a British pound was worth $1.20. Now it’s going for $1.34. The euro’s gone from $1.05 to $1.19. The euro rally may have further room to run. The Financial Times recently reported that “speculators were holding the biggest net long position on the euro against the dollar since May 2011.”

This is important to understanding what’s happening in today’s market. Despite a good year for stocks, both the Dow and S&P 500 would be down for the year if they were priced in euros. The slumping dollar has not only helped us rally, but it’s affected the nature of the rally. Let’s dig into this some more.

Right now, the economy of the United States is out of sync with much of the developed world, especially Europe. The economy in Europe is basically where we were two or three years ago. Only now are things starting to look up for the Old World. This week, we learned that the British unemployment rate dropped to a 42-year low. Unemployment in Germany is the lowest since reunification. Even France is improving.

As a result, there’s a growing belief that Mario Draghi and the European Central Bank will pull back on their “kitchen sink” strategy for monetary policy. On top of that, the plan for more rate hikes in the U.S. seems to have faded. Capital naturally flows to where it’s treated best, and lately, that’s been away from the USA.

A good example of the dollar’s impact can be seen at AFLAC (AFL), one of our Buy List favorites. The duck stock does a huge amount of business in Japan. As a result, the stock tends to be affected by the dollar/yen exchange rate. A few years ago, the strong dollar routinely dinged several cents per share out of each quarterly earnings report. Now that’s changed. As the yen has crept higher this year versus the dollar, it’s been good for shares of AFL. Recently, AFL jumped above $82. Compare that with the early part of last year, when AFL was going for $55 per share.

No doubt, AFLAC is a good company. But we have to agree that the currency market has given the stock a nice boost.

Now here’s where it gets complicated. Normally when we see the dollar slump, it often means that commodity prices are rising. In turn, that’s good for commodity stocks. Indeed, that’s been the case, as the S&P 500 Materials ETF (XLB) has done quite well this year, especially in the last six months. Did you know that Alcoa is up nearly 60% this year? That’s more than Apple, Facebook, Google or Amazon.

But what’s interesting is that energy stocks haven’t joined in the rally. The energy sector got slammed in 2014-15. While last year saw a modest recovery, this year has been more of nothing. OPEC is even talking about extending its production cuts. Exxon and Chevron are both down for the year. Fortunately, our Buy List doesn’t have any oil stocks.

Normally, we see materials and energy stocks behaving somewhat alike. Not this year. Why? That’s hard to say. It may reflect an emerging global recovery that’s skipped over the energy patch. Nearly every kind of metal has been booming. Zinc recently touched a 10-year high. Copper’s had a strong year as well (except for a nasty correction in the past week). Aluminum is up as well. And for the goldbugs, gold is up smartly this year.

This tells me that there’s demand for industrial metals, which means there’s a demand for industry. For example, the homebuilders are having a good year. The materials trend filters down to Buy List stocks such as Sherwin-Williams (SHW) and Axalta Coating Systems (AXTA).

We’re seeing a similar effect happening in defensive stocks. Healthcare and consumer staples normally tack each other fairly well, but not this year. It’s been a good year for healthcare stocks. On our Buy List, Stryker (SYK) is up more than 20% for us this year. But the consumer staples stocks have lagged, sometimes badly. On our Buy List, Hormel Foods (HRL) and Smucker (SJM) are both in the red.

Especially weak lately has been the financial sector. Typically, financial stocks rally when short-term interest rates rise. Or, more accurately, the hope for higher short rates rises. Financial stocks soared after last year’s election but haven’t done much of anything since then. August was an especially bad month for financials. Later on, I’m going to highlight Signature Bank (SBNY), which I think has finally fallen to a very good price point.

The tech sector has also been very strong this year. The S&P 500 Tech Sector ETF (XLK) is now up 22% this year. On our Buy List, we’ve seen the tech effect with Microsoft (MSFT), which is a 20% winner YTD. Many of the tech stocks have a global reach, so the weak dollar is a positive.

The weak dollar has also followed the small-cap sector lower. Both peaked after the election late last year, and both have drifted lower this year. This may be having an effect on the market’s appetite for risk. With volatility so low, there’s not much room for action for excitable day traders. As a result, this may be pushing them towards more extreme markets like bitcoin. I can’t be positive, but there may be a direct relationship between the stock market’s calmness and bitcoin’s frenzy. The virtual currency is down by one-third in the last 12 days.

What to do now: Wall Street is largely in a state of limbo until Q3 earnings season begins in another month. The recent economic numbers look good. The Fed may even be leaning towards a December rate hike. (I hope not, but it’s possible.)

It’s important for investors not to be scared out of this market. The fundamentals are strong, but the market is always vulnerable to a near-term hit. I also think it’s possible that a dollar rally could cause an internal market rotation.

As always, I like the stocks on our Buy List. Stocks like Ross Stores (ROST), Intercontinental Exchange (ICE) and Signature Bank (SBNY) look especially good here. Now let’s look at some updates to our Buy List stocks.

Buy List Updates

I had wanted to wait a bit before I updated some of our Buy Below prices, but now that we’re in the quiet period of September, I think this is a good opportunity for us to make some adjustments.

Cerner (CERN) continues to be a very strong performer. Cerner is now up 52% on the year for us. It’s our #1 performer. Last year, it was our #2 worst stock. Funny how that happens. In July, the healthcare-IT company had another solid earnings report. Cerner also narrowed its full-year EPS guidance from $2.44 to $2.56, to $2.46 to $2.54.

The next earnings report should come out in late October. The company expects Q3 earnings between 61 and 63 cents per share. This week, I’m raising my Buy Below on Cerner to $76 per share.

Look for Microsoft (MSFT) to raise its dividend next week. The current quarterly payout is 39 cents per share. I’m expecting 42 cents, maybe 43 cents per share. In the last seven years, the software giant has tripled its dividend. Too many investors look past dividends. This is a mistake. Consider this stat: If MSFT goes to 43 cents, that means an investor who got the stock at the start of the bull market would be yielding 11.6% based on their purchase price. Not too bad. I’m keeping my Buy Below for Microsoft at $76 per share.

I previously said I wanted to hold off on raising my Buy Below price for Continental Building Products (CBPX), but I’ve been impressed with the stock’s resiliency. The shares got a boost after Hurricane Harvey. I’m going to lift my Buy Below on CBPX to $26 per share.

Signature Bank (SBNY) has been a very frustrating stock to watch. It soared after last year’s election. The shares gained 21% in just four days. But it’s been a wreck ever since, especially since June. Lately, SBNY seems to go down every single day. On Thursday, the shares dropped below $120. The next earnings report should be out around mid-October. I’m lowering my Buy Below on Signature to $130 per share.

That’s all for now. The Federal Reserve gets together on Tuesday and Wednesday of next week. I don’t expect them to make any interest-rate moves, but there could be signals about their plans for December. The Fed’s policy statement will come out at 2 pm ET on Wednesday. After that, Fed Chairwoman Janet Yellen will answer questions at a press conference. 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