Morning News: October 11, 2017
Posted by Eddy Elfenbein on October 11th, 2017 at 7:06 am

IMF Warns Against Complacency Even as Global Growth Gains Steam

Japan Shares Rise With Nikkei 225 Closing at Highest Since 1996

Japan’s Quality Control Is Out of Control

Why Chicago’s Soda Tax Fizzled After Two Months — And What It Means for the Anti-Soda Movement

Alibaba’s Meek Big Splash

P&G May Have Beaten Peltz, But Shouldn’t Spike the Ball

Apple Joins Forces With Steven Spielberg’s Amblin Television

Amazon’s Clever Solution to Stolen Deliveries: Your Trunk

Walmart Announces Speedy Returns Program

Hyundai Mounts Charm Offensive at U.S. Dealers to Stem Slump

Asset Manager BlackRock’s Profit Beats Wall Street View as Fees Rise

Joshua Brown: Where Have All The Cowboys Gone?

Cullen Roche: Congratulations Richard Thaler!

Michael Batnick: The Price of Progress

Jeff Carter: Where Disagreement is Embraced

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Dow to 1,000,000 in 100 Years?
Posted by Eddy Elfenbein on October 10th, 2017 at 2:22 pm

Warren Buffett recently said that the Dow Jones Industrial Average will get to 1,000,000 in 100 years. To be fair, he said “over” 1,000,000.

That may sound incredible, but he was actually being conservative. Let’s get mathy.

Yesterday, the Dow closed at 22,761.07. To get to 1,000,000 it will need to grow by 3.855% per year for the next 100 years.

Contrast that to the last 100 years. The Dow closed at 79.26 on October 9, 1917. That works out to CAGR of 5.823%. So Buffett was assuming a growth rate of one-third less than before.

If we’re able to maintain the same rate of growth as the last century, then we’ll hit 1,000,000 in no time.

Just 2084.

Express Scripts Buys EviCore Healthcare
Posted by Eddy Elfenbein on October 10th, 2017 at 2:16 pm

Express Scripts (ESRX) said they’re buying EviCore Healthcare for $3.6 billion.

Buying EviCore will help Express Scripts broaden its reach beyond prescription drugs into being a gatekeeper for insurance companies for a wider range of medical services. Health plans hire EviCore, which manages medical benefits for 100 million people, to help reduce medically unnecessary imaging and other expensive tests.

The purchase will complement Express Scripts’ main business of managing prescription-drug benefits for health plans, employers and unions. The combination provides “significant opportunities for cross-selling to both client bases,” Express Scripts said in a statement.

Express Scripts said that the deal, which must be approved by regulators, is expected to close in the fourth quarter of 2017. EviCore will be run as a standalone business unit within Express Scripts, the company said.

Express Scripts is down about 1.8% today.

Stock Returns and TIPs Yields
Posted by Eddy Elfenbein on October 10th, 2017 at 9:40 am

I recently looked at the relationship between stock market returns and TIPs yields. I found that 1.10% on the five-year TIP is a good tipping point for the stock market.

When the five-year TIP has been yielding 1.1% or more, the stock market (as measured by the Wilshire 5000 Total Return) has lost 2.1% annualized.

But when the five-year TIP has been 1.09% or less, then the market has gained 17.1% annualized.

The data goes back to January 2003 so we almost have 15 years of data. I wish we had more. I suspect that over time, we’ll see a tipping point yield around 1% to 1.5%.

On Friday, the five-year TIP closed at 0.19%. So going by that, we’re still a long way from bonds being competitive against stocks.

Here’s the five-year TIPs yield along with its tipping yield in red. The blue line hasn’t been above the red line in over eight years.

The Stock Market Bottomed Out 15 Years Ago Today
Posted by Eddy Elfenbein on October 10th, 2017 at 9:13 am

The S&P 500 reached its intraday low exactly 15 years ago today. At 10:10 am on 10/10/2002, the S&P 500 got down to 768.63.

Later that day, the market would rally to close over 800 so the lowest close came the previous day on October 9 when the S&P 500 closed at 776.76. Weirdly, that number is very close to the Dow’s lowest number during the bear market that ended 20 years before (776.92).

The bull market would last exactly five years. Or almost exactly. The highest close would come on October 9, 2007 at 1,565.15. The intra-day high (1576.09) came on October 11. Those days perfectly bookend the fifth birthday of the rally.

Basically, the stock market doubled in five years.

Morning News: October 10, 2017
Posted by Eddy Elfenbein on October 10th, 2017 at 6:47 am

Oil Rises to $56 on Saudi Export Cut

Elon Musk’s Offer to Rebuild Puerto Rico’s Electricity Grid is a Game-Changer

Thank Richard Thaler for Your Retirement Savings

How Does Cryptocurrency Fit Into a Portfolio?

BAE to Cut Almost 2,000 Jobs as Eurofighter Backlog Dwindles

GE Just Caved and Put One of Nelson Peltz’s Colleagues on its Board

Walmart’s E-Commerce Business Is Battling Target and Costco as Much as Amazon

G.M. Acquires Strobe, Start-Up Focused on Driverless Technology

Alphabet Launches U.S. Ad Campaign to Promote Driverless Car Safety

China Hastens the World Toward an Electric Car Future

Google, Facebook and Twitter Scramble to Hold Washington at Bay

Kobe Steel Faked Data for Metal Used in Planes and Cars

Howard Lindzon: The Bull Market In Everything?

Ben Carlson: Worst Practices in Institutional Asset Management

Roger Nusbaum: Jobs Weak, Market Doesn’t Care

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Barron’s on Cognizant
Posted by Eddy Elfenbein on October 9th, 2017 at 3:38 pm

Barron’s highlights the Cognizant Technology Solutions (CTSH) shift to digital consulting. Five years ago, it was barely a speck within CTSH’s business, but today, digital consulting accounts for 25% of their revenue. Cognizant has been having a very good year.

Last year, revenue rose 8.6%, the smallest increase ever, and net income fell 4%, to $1.6 billion, or $3.39 a share, as certain health-care clients postponed spending due to merger-related activity. This year, things are going better; Cognizant beat estimates in the first and second quarters, as client spending resumed. Full-year earnings are expected to rise more than 30%, to $2 billion, or $3.71 a share, fueled by profit-margin expansion and stock buybacks, on a 10% jump in revenue, to $14.8 billion.

The stock still isn’t expensive.

Even after the stock’s latest rally, shares trade for 17 times next year’s expected earnings, below their five-year average of 17.5 and at a steeper-than-usual discount to rival Accenture (ACN), which sports a price/earnings ratio of 19. “They are running and chewing gum at the same time by trying to grow their digital business and improve margins,” says Lisa Ellis, a senior analyst at Bernstein, who says the market is skeptical, given the stock’s depressed P/E. “I see this as a straightforward execution story over the next several quarters. They have talked about their plans with a high level of specificity.”

Ellis thinks Cognizant’s stock could hit $84 in the next year, 15% above last week’s level, based on her view that earnings will grow at a midteens rate in the near term, helped by margin improvement. Additionally, large banks could begin spending on technology again after years on the sidelines, and clients could speed the growth of their digital businesses. In that case, Cognizant’s shares could earn a higher multiple. Ellis has above-consensus earnings estimates of $4.52 a share for next year and $5.33 for 2019.

Human Progress Is Lower Transaction Costs
Posted by Eddy Elfenbein on October 9th, 2017 at 2:01 pm

Here’s an interesting article about one of the great, unacknowledged aspects of history: the reduction of transaction costs. Most people don’t give it a moment’s thought, but exchange is how we acquire things that we want. For much of history, there have been all sorts of hurdles impeding exchanges. The more we have reduced the hurdles, the better it has been.

Or consider the great economic transaction cost reducer, money. When we say that the problem with barter is that we cannot find someone who both has what we want and wants what we have, we are making a claim about high transaction costs. By being a generally accepted medium of exchange, money assures buyers that the seller will always want what they have and assures sellers that the other party will have what they want. It dramatically reduces the transaction costs of economic exchange, promoting more trade and greater wealth.

One can also point to a whole variety of other economic and social institutions that reduce the costs of engaging in exchange. The major institutions of a liberal society that do so are clearly defined and well-enforced property rights, the rule of law, and stable money. The market as a whole, and especially market prices, reduce transactions costs as well.

Axalta Cuts Its 2017 Outlook
Posted by Eddy Elfenbein on October 9th, 2017 at 11:12 am

This morning, Axalta Coating Systems (AXTA) updated its Q3 guidance in light of the hurricanes. The company now sees Q3 and full-year EBITDA in the range of $205-$215 million and $870-$900 million, respectively.

Sales for Q3 should be between $1.08-$1.10 billion while full-year sales are to expected to grow between 6% and 7%.

Charles W. Shaver, Axalta’s Chairman and CEO, commented that “We have seen and expect moderate effects on our business from recent hurricanes and the earthquake in Mexico, largely in terms of lost near-term volume opportunity. We believe that much of this impact will be made up during the course of 2018, and hence see these impacts as largely transitory.” Mr. Shaver continued, “After recent discussions with certain Performance Coatings distribution partners, we are incorporating the expected impact of a focused reduction in distributor working capital levels for the balance of the year. Following this adjustment, we expect volumes for the segment to return to more normal levels during the fourth quarter.” Mr. Shaver further commented that “We also continue to see impacts across coatings markets from tight supply conditions for raw material inputs, and given time lags to recovery via pricing adjustments, we have factored in a wider price-cost gap into our 2017 outlook. We expect to close the gap caused by raw material price pressure over the coming year.”

Robert W. Bryant, EVP and CFO, added, “Although we never like to see business impacts of these sorts, we believe the majority of the effects we have described are largely one-time in nature, and much of these are expected to be recovered through the course of 2018. We continue to have confidence in the underlying business climate, and note that the economics in each of our end-markets remain stable as we look forward. We are also revisiting and will increase our plans for cost reduction and productivity measures that should incrementally benefit Axalta in 2018.”

The stock is down about 4.4% this morning.

Richard Thaler Wins the Nobel Prize
Posted by Eddy Elfenbein on October 9th, 2017 at 10:04 am

Richard Thaler has been awarded this year’s Nobel Prize for Economics. He is the 29th winner from the University of Chicago over the last 47 years.

Here’s Thaler’s scene with Selena Gomez in The Big Short:

Here’s “A Dozen Things I’ve Learned from Richard Thaler About Investing” by Tren Griffin.