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

Barclays and Former Executives Charged Over Qatar Fund-Raising

Lockheed Signs Pact With Tata to Make F-16 Planes in India

Hammond, Carney Fight for City of London as Brexit Talks Start

Trump May Have A Lot Of Money, But Documents Show He Owes A Lot, Too

Millennials Are Helping America Save More Money

Texas Is Too Windy and Sunny for Old Energy Companies to Make Money

UPS to Add Delivery Surcharges for Black Friday, Christmas Orders

Amazon and Whole Foods Could Revolutionize Grocery Delivery. But Do Shoppers Want It?

Blue Apron Pursues I.P.O. as Amazon Looms Over Industry

Boeing Lifts 20-Year Industry Demand Forecast to $6 Trillion

To Prevent Fantasy Monopoly, FTC Blocks DraftKings-FanDuel Merger

Time Warner Signs $100 Million Deal With Snap for Shows and Ads

Samsung Electronics Plans Galaxy Note 8 Launch Event for August

Roger Nusbaum: The Hike Everyone Was Expecting

Cullen Roche: Discipline vs. Knowledge

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Morning News: June 19, 2017
Posted by Eddy Elfenbein on June 19th, 2017 at 6:49 am

A Plan For Brexit

Chinese State Oil Giants Take Petrol Price Battle To The Pumps

Bitcoin Is Digital Gold. But Will You Buy a Sandwich With It?

Banks Were Told to Keep Skin in Game. They Securitized That, Too

Western Union Built Its Business on Migrants. Can It Survive the Backlash Against Them?

YouTube Sets New Policies to Curb Extremist Videos

Whole Foods Deal Shows Amazon’s Prodigious Tolerance for Risk

Is Spotify Ready for the Big Time?

Lockheed Nears $37 Billion-Plus Deal to Sell F-35 Jet to 11 Countries

The Last Hurrah of Airbus’s Trillion-Dollar Man

Breweries Worry About Anheuser-Busch InBev’s Stake in RateBeer Stite

The Decline of the Baronial C.E.O.

Jeff Miller: Is The Housing Rally Over?

Josh Brown: Flattening is Not Threatening

Michael Batnick: These Are The Goods

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CWS Market Review – June 16, 2017
Posted by Eddy Elfenbein on June 16th, 2017 at 7:08 am

“If you’ve followed my forecasts, you’ve probably lost a lot of money.”
– St. Louis Fed President James Bullard

Well…it happened. As expected, the Federal Reserve raised interest rates again this week. I don’t like it, but we can’t always choose the ideal environment to invest in. If you wait for things to be perfect, then you’d never be in the market.

This was an important meeting for the Fed because they also explained what they intend to do with their enormous balance sheet. This has been a big concern on Wall Street. I’ll explain what it all means. Additionally, the central bankers updated their economic projections. I should explain that the Fed has a pretty dismal track record of predicting where things will go, but it’s still useful to look at their outlook for the economy.

Fortunately, the stock market continues to hold up well. The S&P 500 closed at another all-time high on Tuesday. However, there’s been a significant weak link in the market recently, and that’s big-cap tech stocks. Don’t feel too bad for these guys. They’ve been running up the score lately, so I can’t say it’s not wholly surprising to see them face a little pain. Outside of Microsoft, this recent trend hasn’t had a big impact on our Buy List. In fact, our Buy List has been doing quite well of late. Before I get to all that, let’s look at what the Fed did this week.

The Federal Reserve Raises Interest Rates

On Wednesday afternoon, the Federal Reserve released its latest policy statement. The central bank said they raised their range for the Fed funds rate to between 1% and 1.25%. That’s an increase of 0.25%. This was the second rate hike this year, and the fourth of this cycle.

As I’ve said before, I think this move is a mistake, and I won’t belabor the arguments against the increase. It happened, and we have to move on. I’ll note that there was one dissenting voice, Neel Kashkari of the Minneapolis Fed, who agrees with me.

On Wednesday morning, just hours before the Fed’s statement, the government released the inflation report for May. The report again showed that there’s absolutely no threat of inflation on the horizon. If anything, the rate of inflation has fallen off sharply over the last three months. It’s hard to justify rate increases to fight off an inflation threat that doesn’t exist.

During May, the headline rate of inflation fell by 0.1%. Economists had been expecting no change. Some of that was due to falling prices for gasoline. That’s why we also want to look at the “core rate,” which excludes volatile food and energy prices. But the core rate for May only rose by 0.1%. There’s simply not much inflation out there.

You may recall that March was the weakest month for core inflation in over 30 years. As with all stats, we don’t want to be fooled by one-point trends. There are always outliers, so we want to see more evidence. Indeed, that evidence came in the last two months. Core inflation for April and May were the second- and third-weakest of the last three years, trailing only March. So it’s not only that inflation is low: it’s actually going lower.

More troubling is that we’ve seen a swift reaction in the bond market. On Tuesday, the yield on the 10-year Treasury dropped to 2.1%. That’s the lowest point all year. After the election last year, Treasury yields soared on economic optimism, but that’s largely faded in recent weeks. The spread between the two-year and ten-year Treasuries is now less than 80 basis points.

In the Fed’s policy, they acknowledge the recent weakness in the economy, but they seem to feel that it will soon pass. I hope they’re right, but I just don’t see the evidence just yet. In fact, this week’s retail-sales report was another dud. Economists had been expecting a gain of 0.1%. Instead, retail sales fell 0.3% in May. This was the biggest drop in 16 months.

But the Fed thinks they’ve only started raising rates. According to the latest Fed projections, they expect to raise rates one more time this year. After that, the outlook becomes a lot less clear (the blue dots get much more dispersed). The Fed sees three more hikes in 2018, and possibly three more in 2019. That means it’s possible that the 2/10 spread could be negative as early as next year. Still, I don’t want to be too alarmist. By the Fed’s own projections, they see real interest rates staying negative for another 18 months. My point is that we’re not in the danger zone just yet, but we can see it on the horizon.

The Fed also unveiled its plans for what they intend to do with their $4.2 trillion balance sheet, or as the Fed calls it, their “normalization plans.” The Fed said they plan to stop reinvesting the proceeds of their bonds in gradually increasing increments. It will be a long, long time before the balance sheet gets back to normal. But the key point is that the Fed intends to raise rates at the same time they address their balance sheet. That point wasn’t always so clear.

The Great Tech Stock “Crash” of 2017

What’s happening with tech stocks? The tech sector has fallen four times in the last five sessions, and some of those drops have been pretty sharp. The stock market had been so placid for so long that a fairly minor bump in the road for large-cap tech stocks has rattled a lot of investors.

Let’s add some context here: tech stocks had been leading an already powerful rally. In fact, the rally hasn’t even affected the whole sector. A huge part of the gains have fallen on just five major stocks; Facebook, Apple, Amazon, Microsoft and Google. That’s right: the latest acronym hitting Wall Street is FAAMG.

At one point, Facebook, Amazon and Apple were all up over 30% for the year. That was more than three times the rest of the market. Not anymore! In the last week, the Tech Sector ETF (XLK) has dropped from $57.44 to $55.57.

I want to stress that the damage we’re seeing in tech is hardly unprecedented. What’s been unusual is the exceedingly low volatility visible until now. It’s the change from very, very low volatility to normal behavior that’s jarred Wall Street. Frankly, the current losses are very normal.

Our Buy List has largely side-stepped the FAAMG phenomenon, with the exception of Microsoft (MSFT). Shares of MSFT just pulled back below our $70 Buy Below price. Again, that’s following an impressive run-up. Of all the FAAMG stocks, Microsoft is the one I’m least worried about. The last few earnings reports have been quite good. Also, I’m expecting another dividend hike in September. For now, I’m not worried about Microsoft, but I think we’ll see more losses in the tech sector for a few more weeks. Now let’s look at some of our Buy List stocks.

Buy List Updates

There hasn’t been a lot of news impacting our Buy List stocks this week. The good news is that our performance versus the rest of the market continues to be strong.

This week, I want to make a few adjustments to some of our Buy Below prices. As always, please bear in mind that these are not price targets. Instead, they’re guidance for current entry into a stock.

First up is AFLAC (AFL). I’m lifting my Buy Below on the duck stock to $80 per share. AFL has gapped up recently. Paul Amos, the current president and CEO’s son, said he’ll be leaving the company. That probably takes him out of the running to be the next CEO.

I’m also raising our Buy Below on Fiserv (FISV) to $131 per share. This stock is as strong and steady as it’s ever been. I’m looking forward to another good earnings report next month.

I’m dropping my Buy Below on Ross Stores (ROST) to $66 per share. I still like Ross a lot, but the stock has been caught up in a poor environment for retail. I’m not worried about Ross. This will be a real bargain if you can get Ross below $60 per share.

Finally, I’m lowering my Buy Below on Snap-on (SNA) to $168 per share. This is another good stock caught in a downtrend.

That’s all for now. There’s not much in the way of economic news next week. On Wednesday, we’ll get the existing-home sales report for May. Then on Friday will be the new-home sales report. For now, the housing sector is a bright spot in the economy, while consumer spending looks tired. We’ll see how long this can last. 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 16, 2017
Posted by Eddy Elfenbein on June 16th, 2017 at 7:03 am

BOJ Upgrades View on Consumption, Rules Out Early Exit From Stimulus

The Housing Recovery Is Leaving Out Most of America

Major Changes Are Coming to the U.S. Grocery Industry

Google Faces Record EU Antitrust Fine

At Last, Jeff Bezos Offers a Hint of His Philanthropic Plans

Dow Chemical and DuPont Have Won U.S. Antitrust Approval to Merge

Nestle’s ‘Quiet Man’ Shows Hand in Move to Sell U.S. Sweets

Nike to Cut Jobs Amid Struggle Against Adidas

Snapchat’s Stock Just Dipped to Its IPO Price for the First Time

Booz Allen Hamilton Says It Is Under Federal Investigation

Air Bag Maker Takata To File For Bankruptcy This Month

Anbang’s Sales Dry Up In New Challenge For Chinese Insurers

Jeff Miller: Can Psychology Be Applied to Market Behavior?

Cullen Roche: The Era of Irrational Apathy

Jeff Carter: Sunk Costs and Investing

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Morning News: June 15, 2017
Posted by Eddy Elfenbein on June 15th, 2017 at 7:08 am

Greece Set to Get Cash to Pay Bills, But Debt Relief Elusive

Oil Sinks to November Lows on Shock U.S. Gasoline Build

Who Will Be The Next Fed Chair?

Saudi Aramco IPO Hits Speed Bump as Prince, Executives at Odds Over Where to List

Tesla Seeks Import Duty Exemption from Government for India Launch

Amazon’s Debit Card Discount Is One More Weapon in Its Battle Against Walmart

Why Jeff Immelt’s GE Succession Will Go Much Better Than Jack Welch’s

Starbucks: Can It Deliver?

A Russian Software Billionaire Takes on SAP and Oracle

Advertisers, Afraid to Offend, Weigh in on Shakespeare and Megyn Kelly

Western Digital Seeks Court Injunction to Block Sale of Toshiba Chip Unit

Wells Fargo Is Accused of Making Improper Changes to Mortgages

Ben Carlson: How Markets Respond to Geopolitical Crises

Roger Nusbaum: Retirement Reading Roundup

Howard Lindzon: Fractionals and the Instividual

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Weak Inflation Again
Posted by Eddy Elfenbein on June 14th, 2017 at 9:22 am

The Federal Reserve wraps up its meeting later today, and the central bank looks to raise interest rates again.

There’s some interesting timing because the inflation report for May came out this morning and it showed that inflation is still pretty weak.

The headline inflation rate fell 0.1% in May while economists had been expecting no change.

The “core rate” rose by 0.1%. That’s the second-lowest in the last four years. There simply isn’t much inflation to worry about.

Morning News: June 14, 2017
Posted by Eddy Elfenbein on June 14th, 2017 at 7:01 am

May Is Essentially Being Forced to Either Reverse Article 50 or Seal a ‘Soft Brexit’ Deal For Britain

Gangsters, Grandmothers and Gold: Japan’s New Crime Wave

IMF Raises China 2017 Growth Forecast Again, Partly Due To ‘Policy Support’

Oil Falls as U.S. Stockpiles Rise and IEA Sees 2018 Supply Surge

Coal No Longer King as China Spurs Shift to Cleaner Energy

Mnuchin Reversal on Rich Tax Cuts Stirs Clash With Democrat

Bond Traders’ Roadmap to the Fed, Rates and What’ll Move Markets

Uber Fires More Than 20 Employees in Harassment Probe

Anbang Chairman’s Mysterious Absence Caps Months of Intrigue

Verizon Seals $4.5 Billion Yahoo Purchase as Mayer Heads Out

Zara-Owner Inditex’s Sales May Be Slowing After Upbeat First Quarter

Abu Dhabi’s Etihad Airways to Drop San Francisco Route From October

EU to Investigate Nike, Sanrio, Universal Studios Over Licensing Practices

Joshua Brown: It Has Nothing To Do With Which ETF To Pick

Michael Batnick: All-Time High

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Morning News: June 13, 2017
Posted by Eddy Elfenbein on June 13th, 2017 at 7:05 am

U.K. Inflation Rate Rises More Than Forecast to Four-Year High

Markets Unfazed as Federal Reserve Nears Plan to Shed Bonds

Trump Administration Calls for Major Revamp of Wall Street Rules

Jeff Immelt Ends 16-Year Tenure as CEO of General Electric

Will Walgreens-Rite Aid Deal Fall Flat on FTC Blockade?

Cash Faces a New Challenger in Zelle, a Mobile Banking Service

Cook Says Apple Is Focusing on Making an Autonomous Car System

How Tesla Can Become Worth More Than Apple, According to Morgan Stanley

Hyundai Motor Bets on New Small SUV as China Sales Skid

How Uber’s Chief Is Gaining Even More Clout in the Company

Gymboree Files For Bankruptcy, Plans To Close At Least 375 Stores

Viking Hedge Fund to Return $8 Billion to Investors

The Ether Thief

Ben Carlson: Bulls, Bears & Charlatans

Roger Nusbaum: The Dark Knight Passes

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Morning News: June 12, 2017
Posted by Eddy Elfenbein on June 12th, 2017 at 6:53 am

Preparing for `Brexit,’ Britons Face Economic Pinch at Home

This Guy Is Trying to Cure Hong Kong’s Meat Addiction

Tech Selloff Spreads After Friday’s Rout

America’s Stubborn Oil-Supply Glut Catches Funds Off Guard

Apple Is Making Old iPhones New Again to Win India

German Grocery Chain Aldi to Invest $3.4 Billion to Expand U.S. Stores

Culture Clash at a Chinese-Owned Plant in Ohio

JLR Unit Invests $25 Million in Lyft to Help Develop Self-Driving Cars

Uber Board Adopts All Recommendations From Eric Holder Investigation

Uber Weighs Leave of Absence for Chief Executive

Musk’s SpaceX Joins the Military

Fujifilm-Xerox Venture Ousts Executives Over Accounting Trouble

Takata Recommends Re-Electing Board as Search For Rescue Deal Drags On

Cullen Roche: Your Best Investment

Jeff Miller: Is It Time For New Leadership?

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CWS Market Review – June 9, 2017
Posted by Eddy Elfenbein on June 9th, 2017 at 5:08 am

“It’s human nature to find patterns where there are none and to find skill where luck is a more likely explanation.” – William Bernstein

Next week is the big Federal Reserve meeting. Wall Street has already convinced itself that the central bank will again raise interest rates. I’m afraid they’re right. As I’ve said for the past few weeks, I think a rate hike now is a mistake. How big of a mistake is still to be determined. In this issue, I’ll discuss what the Fed’s move means for us and our portfolios.

The good news for us is that the low-volatility rally continues to roll on. In the last 15 trading sessions, the S&P 500 has risen 11 times. The index’s single biggest decline was a mere 0.28% drop. That’s barely a nick. Here’s a great stat I saw from Callie Bost. She noted that since 1990, there have been 15 trading days where the difference between the daily high and low was less than 0.28%. Four of those have come in the last month.

There seems to be an odd paradox. The world appears to grow more volatile while the stock market grows more serene. Or, perhaps this isn’t the paradox it seems. Maybe investors are retreating from news of terrorism and missile tests for the relative comfort of stock investing. Whatever the cause, my top concern is an overly zealous Federal Reserve that looks to contain inflation, which is hardly a problem.

We got a nice earnings report this week from JM Smucker. The jelly people handily beat Wall Street’s estimates thanks to cost-cutting. I’ll have all the details in a bit. I’ll also give you some updates on our Buy List. But first, let’s look at the rate hike that’s almost certainly coming our way next week.

Get Ready for a Fed Rate Hike

On Tuesday and Wednesday of next week, the Federal Reserve gets together for another policy meeting. The two-day affair usually gets a lot of attention because it’s followed by a press conference from Fed Chairwoman Janet Yellen.

Much of Wall Street has this meeting circled on their calendars. They figure that if the Fed is going to strike, it’ll do it in June. At this two-day meeting, the Fed also updates its economic projections. These are more often referred to as “the blue dots” in honor of the Fed’s scatter plots.

Earlier this year, the consensus on the Fed was that it would raise interest rates three times this year plus three more times in 2018 and 2019. I thought this was nuts. I reassured readers that the Fed always starts out sounding as hawkish as it can but then gradually gives way. This time, it hasn’t.

During this cycle, the Fed first raised rates in December 2015. They followed that up with another raise in December 2016, and again in March 2017. Traders in the futures market think there’s a 93.5% chance that the Fed will hike next week. If they’re right, that would move the target for the Fed funds rates from 1% to 1.25%.

What about after that? Traders see the Fed standing pat for a few months. I think that’s right. But by the December meeting, another rate hike is in play. Right now, the odds are very nearly even money for a December hike.

I’ll briefly restate my opposition. The Fed should only move once there are signs that inflation is heating up. Those signs aren’t here yet. The commodity markets aren’t rallying. Oil has been falling lately. The latest CPI reports have been very tame. We’ll get the May CPI report on Wednesday, the morning of the Fed’s announcement.

Last week’s employment report was not terribly strong. The U.S. economy created just 138,000 net new jobs. Economists had been expecting 185,000. The numbers for March and April were revised lower. The growth in wages is actually decelerating slightly. The yearly growth number fell from 2.51% in April to 2.46% for May.

I don’t want to sound overly alarmist. There have been improvements in the economy. The last earnings season was quite decent. But as far as interest rates go, I think the Fed needs more time. I’m particularly concerned to see long-term interest fall. After the election, long-term yields soared on the prospects of greater economic growth. To be fair, yields at the long end had been rising since the summer.

We heard a lot about the Trump Trade, but that started to unravel in December. Three months ago, the 10-year Treasury was yielding over 2.6%. Lately, it’s gotten close to 2.1%. If the Fed follows through with its rate hike, the famous Two/Ten Spread will probably fall below 70 basis points. That would be a nine-year low. That’s still not in the danger zone, which is 0.00, but it’s getting close. The hidden story here is that the Fed’s “ceiling” for rate increases is probably a lot lower than folks want to admit.

What effect will the Fed have? Higher short-term rates would come as a relief to many financial stocks. In fact, we saw a nice bounce in Signature Bank (SBNY) on Thursday. At the opposite end, dividend stocks will lose some of their luster. A stock that yields 3% is a wonderful thing in a 0% interest rate world. It becomes gradually less impressive as interest rates climb higher. Now let’s look at our most recent Buy List earnings report.

Smucker Beats Earnings Thanks to Cost-Cutting

On Thursday morning, JM Smucker (SJM) reported fiscal Q4 earnings of $1.80 per share. That was eight cents more than expectations. For the whole fiscal year (ending in April), Smucker made $7.72 per share. Their previous guidance had been for $7.60 to $7.70 per share. In February, the company lowered the top end of its full-year forecast by five cents per share. As it turned out, the original guidance was pretty close to the mark.

“In fiscal 2017, we grew adjusted EPS by 7 percent over the prior year,” said Mark Smucker, Chief Executive Officer. “In the new fiscal year, we continue to execute our strategic plan for sustainable, long-term growth by capitalizing on changes in consumer preferences and the retail environment. We will fuel the momentum of our growth brands like Smucker’s® Uncrustables®, Nature’s Recipe®, and Café Bustelo®, while supporting our base businesses in coffee, peanut butter, pet food, and pet snacks. Accelerated cost savings and expanded capabilities are key components of our multi-dimensional strategy to deliver top- and bottom-line growth and increase shareholder value.”

Now for guidance. For fiscal 2018, Smucker said they expect earnings to range between $7.85 and $8.05 per share. That’s pretty good. Wall Street had been expecting $7.93 per share. They also said they expect net sales to rise by 1%. SJM pegs this year’s free cash flow at $775 million and capital expenditures at $310 million.

This was a good quarter for Smucker, but a lot of the earnings beat was thanks to cost-cutting. Don’t get me wrong—that still counts, but I would have liked to see more top-line growth. You can only cut costs so much.

The shares of SJM gapped up more than 2% at the open, but that didn’t last. By the closing bell, SJM closed at $128.51, for a loss of 1.81%. I should add that there’s a remote possibility that someone big will come along and try to buy SJM out. Smucker remains a buy up to $128 per share.

This earnings report will be our only Buy List earnings report until Q2 earnings season gets going in another five weeks. One outlier is RPM International (RPM). The company ended its fiscal year in May, but it won’t report its Q4 earnings until late July. Now let’s look at some recent news from our Buy List stocks.

Buy List Updates

We’re coming up on the midpoint of the year. In early July, I’ll have a more thorough breakdown of our Buy List’s first-half performance, but for now, I can say that it’s shaping up to be a pretty decent year for us.

Through Thursday, our Buy List is up 10.43% for the year, while the S&P 500 is up by 8.71%. Those numbers don’t include dividends (the Buy List yields a bit less than the S&P 500, but it’s not very much). I’ll include the dividend numbers in our first-half summary.

Our best performer on the year is Cerner (CERN), which is up by 43.78%. Second place is CR Bard (BCR), with a gain of 39.71%. We now have 11 Buy List stocks that are up more than 13% on the year. Six of our stocks are in the red. The biggest loser is Express Scripts (ESRX), which is down 12.25%.

This week, Sherwin-Williams (SHW) finally completed its $11.3 billion acquisition of Valspar. The deal was first announced 15 months ago. The problem was clearing some of the anti-trust hurdles. This is where another one of our Buy List stocks, Axalta Coating Systems (AXTA), came to the rescue. The companies decided to sell off Valspar’s North American Industrial Wood Coatings to Axalta for $420 million in cash. The regulators were cool with that, and it was a done deal.

The combined company will have revenues of about $16 billion. Sherwin said they’ll announce their Q2 earnings on July 20. At that time, they’ll provide guidance for the combined company for Q3 and all of 2017. This week, I’m lifting my Buy Below on Sherwin-Williams to $350 per share.

Intercontinental Exchange (ICE), is holding its first analyst day today, and the stock has been rallying, perhaps in anticipation. This is a good time for ICE to explain itself to the world, because too many investors see ICE as simply a trade-volume based business. In reality, ICE is becoming more dependent on data sales and technology fees. The company, for example, recently bought Bank of America’s index platform. Barron’s rightly said that Intercontinental Exchange is “misunderstood, underappreciated and underowned.” This week, I’m raising my Buy Below on ICE to $66 per share.

Earlier I mentioned that CR Bard (BCR) is our second-biggest gainer this year. As I’m sure you recall, Bard is in the process of being bought out by Becton, Dickinson (BDX). The deal calls for BCR shareholders to get $222.93 per share in cash plus 0.5077 shares of BDX.

The good news is that shares of BDX have been rallying. They’re even higher now than when the deal was announced in April. Going by Thursday’s close, Bard is valued at $320.32 per share. Bard’s actual shares are going for 2% below that. That’s quite natural since there’s a chance the deal could fall apart. I doubt it will happen, but we have to aware of the possibility.

The sizable cash portion of the deal protects Bard shareholders from large swings in BDX’s share price. It’s a relief to see that the market hasn’t turned against BDX for proposing such a large deal. The deal is expected to close this fall. If all goes well, you can expect to see that 2% discount for Bard gradually close.

That’s all for now. The big news next week will be the Federal Reserve meeting on Tuesday and Wednesday. The Fed’s decision will come out at 2 p.m. Wednesday afternoon, and it will be followed by a press conference by Fed Chairwoman Janet Yellen. The Fed will also update its economic projections (i.e. the “blue dots”). That morning, we’ll also get the CPI report for May. I doubt we had much in the way of inflation last month. 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