Author Archive

• Morning News: June 29, 2022
  Eddy Elfenbein, June 29th, 2022 at 4:08 am

  G-7 Bid to Cap Russian Oil Price Faces Hurdle of Global Enforcement

  West’s Challenges in Tackling Russia Exposed at G-7

  ECB’s Chief Economist Sees Double-Sided Risk Of Spiraling Inflation And An Economic Slowdown

  UK Economy Faces Double Threat of Inflation Surge, Recession Risk

  Fed’s Williams Sees Another Large Rate Rise in July as Possible

  Copper Crushed as Funds Turn Negative on Recession Fears

  Can Regulators Catch Up to Crypto?

  Bankman-Fried Warns: Some Crypto Exchanges Already “Secretly Insolvent”

  As Prices Skyrocket, Coupons Are Harder to Find Than Ever

  This Is What Happens When Tech Executives Start Believing Their Own Hype

  Byju’s Said to Offer More Than $1 Billion for 2U to Expand in US

  F.T.C. Accuses Walmart of Facilitating Consumer Fraud Through Its Money Transfer Business

  Rural Counties Are Booming, But Can It Last?

  Disney Board Renews Bob Chapek as C.E.O.

  Pinterest CEO Is Stepping Down, Google Commerce Executive to Take Top Job

  Creative Artists Agency Acquires ICM in Deal that Could Transform Hollywood Representation

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• CWS Market Review – June 28, 2022
  Eddy Elfenbein, June 28th, 2022 at 7:56 pm

  (This is the free version of CWS Market Review. If you like what you see, then please sign up for the premium newsletter for $20 per month or $200 for the whole year. If you sign up today, you can see our two reports, “Your Handy Guide to Stock Orders” and “How Not to Get Screwed on Your Mortgage.”)

  The Stock Market Appears to Be Calming Down

  The stock market may be chilling out from its convulsions of recent weeks. That’s a welcome change. I can’t say whether this new-found calmness will last. As we know, Wall Street can change its mind on a dime.

  The S&P 500 fell by 2% today, but a lot of today’s damage was in the tech sector. Here’s an interesting stat that I think sums up the recent market. Three times in the last eight sessions, the S&P 500 closed up or down by less than 0.3%. Yet in the 18 sessions prior to that, every single daily change was more than 0.3%. On Wall Street, the storms can be brutal, but they often pass quickly.

  

  I’ve also talked a lot about the divergence between risky, highly-volatile stocks and more conservative, stable stocks. During the big market drop, those two groups were diametric opposites, and it was risky stocks feeling the most pain. Lately, however, the distance between those two groups has calmed down as well.

  The market reached its recent low on June 16 when the S&P 500 closed at 3,666. While the market has recovered a little since, it hasn’t been a strong jerk to risky stocks as it’s been in previous bear market rallies.

  If the market is uncertain, that’s largely due to the economic outlook also being uncertain. Tomorrow, the government will update its report on Q1 GDP. The last report said that the U.S. economy contracted at an annualized rate of 1.5% during the first three months of the year. That report led many analysts to conclude that a recession is imminent. The Atlanta Fed’s GDPNow tool expects Q2 growth of just 0.3%.

  I don’t think that’s right. There were some technical reasons for why the GDP report was so low, and I don’t expect that to continue into Q2. Still, I don’t want to brush off the possibility of a recession. My disagreement is about time. I think the odds of a recession are low for right now, but a recession is very possible next year or in 2024. Higher rates from the Fed will slow things down, but it will take some time.

  Consumer Confidence Falls to an 18-Month Low

  Today we got some troubling economic news. Consumer confidence fell to an 18-month low. (Personally, I’d like to see this reported as consumer humility rose to an 18-month high, but that’s me.) I can’t say I’m surprised. Consumers are facing higher prices and shortages.

  The consumer confidence index for June dropped to 98.7 from May’s revised reading of 103.2, which was adjusted downward by more than 3 points.

  Driving down the overall level was a steep decline in consumers’ expectations for the next six months. The expectations index fell from 73.7 to a reading of 66.4 — the lowest level in nearly a decade, according to the report.

  This isn’t the only bit of info suggesting that consumers aren’t happy. Last week, the University of Michigan’s Consumer Survey fell to its lowest level since they started collecting data in 1952.

  I’ve also noticed a change in trends underlying the market. As I mentioned earlier, the risky stock/stable stock dichotomy has cooled down. It may have been replaced by a new dichotomy which is the gap between cyclical stocks and non-cyclicals.

  Let me explain. Over the last few days, economically cyclical stocks have badly lagged the market. Energy stocks in particular have done poorly although that’s after a very robust rally this year.

  But we’ve seen similar behavior in other areas. Recently, the S&P 500 Materials Index lagged the S&P 500 every day for 12 straight days. The S&P 500 Industrials only lagged for six days in a row. Financials stocks have also been sluggish.

  Here’s the S&P 500 Materials ETF divided by the S&P 500 ETF:

  

  That isn’t merely underperforming. It’s underperforming an already bad market. So what’s been leading a downward market? The answer has been healthcare and consumer staples. These stocks haven’t been doing well in an absolute sense, but they’ve been outperforming a falling market.

  This suggests to me that Wall Street is also forecasting if not a full recession, then at least a period of slow growth. I should caution you that Wall Street is usually thinks about six to nine months ahead, so there’s little reason to fear the economy is hitting the skids right now.

  Actually, the upcoming earnings season should be another good one. Analysts recently raised their estimates for Q2. Wall Street now sees earnings growth of 5.41%. That’s up from the prior forecast of 5.25%. (Wall Street expects profits for energy stocks to triple!)

  We won’t get the next jobs report until next Friday, July 8. However, the housing market is still doing well despite higher mortgage rates. Today’s Case-Shiller report said that home prices are up 20.4% in the last year. That’s down a bit from the 12-month period ending in March.

  If there is a bright spot, it’s that we’re entering the best time of year for stocks. At least, historically speaking, July and August have been great months for stocks.

  A few years ago, I took the entire history of the Dow Jones Industrial Average going back to 1896. I further sliced the data to find what the Dow’s average year looks like. Historically, the summertime has been for the bulls. The Dow has rallied from June 29 until September 6. Nearly half of the Dow’s annual gain has come during that brief period.

  Of course, that’s an average over a very long time period, so it shouldn’t be mistaken for a prediction. But we can say that the summer has historically been a good time for stocks.

  Nike Drops 7% After Earnings — Is it a Buy?

  I’m a big fan of Nike (NKE) but the stock rarely goes for an attractive price. This may be one of those rare chances.

  The stock has been doing poorly for the last several months. Nike peaked at $179.10 in November. Today, it reached a 52-week low of $102.75 per share. Whenever a good stock is in the dumps, I want to take a close look.

  Despite the poor performance of the stock, Nike said yesterday that it beat earnings for fiscal Q4. The sneaker folks made 90 cents per share which exceeded estimates of 81 cents per share. Sales dropped slightly to $12.23 billion, but that also topped estimates by $170 million.

  What happened after Nike announced the earnings beat? The shares dropped 7% today.

  

  Nike is facing several problems. Their business got hit hard in China by the lockdowns there. Sales in North America fell by 5%. Nike is trying to alter its business by selling more directly to consumers while bypassing wholesalers. Last quarter, direct sales rose by 7% while wholesale sales fell by 7%.

  One problem area is that Nike’s inventory rose by 23% last quarter. Some of that is due to the supply chain problems. The CFO said they’re not seeing “signs of a pullback” from consumers. Nike is also facing higher costs and longer shipping times, just like everybody else.

  The stat that I’m watching is Nike’s gross margin. That fell last quarter to 45%. Wall Street had been expecting 46.6%. When you lose your gross margin, that tells you that you have a problem with pricing. Part of the gross margin erosion is a result of the weakness in China. I’d include problems with logistics and freight costs.

  Nike said they expect fiscal Q1 sales to be flat to up slightly. They said they expect full-year revenue growth in the low double digits. That’s not that good.

  One analyst described the report as “messy.” That sounds about right. Nike also has the problem that other companies had in that their products were popular during Covid, but now there’s less of a need to buy Nikes again. Still, Nike’s business in doing well in Latin America, Europe and the Middle East.

  I was most impressed that Nike announced an $18 billion share buyback program over four years. That’s a clear vote of confidence from management. Nike has a market value of roughly $162 billion. It may also suggest that Nike is near the end of its large-scale reinvestment program of the last several years.

  Going into the earnings report, Wall Street had expectations that were simply too high. There have been several price target cuts in the last 24 hours. Nike closed today at $102.78 per share. Wall Street expects earnings for the current fiscal year of $4.28 per share. That’s followed by $5.06 and $5.96 for the fiscal year ending in May 2025. Bear in mind that Nike has often traded for more than 30 times trailing earnings.

  I’m calling Nike a cautious buy right now. There are certainly some problems with its business, but they’re fixable. Nike has one of the strongest brand names in the world. Six months from now, Nike might be a candidate for our Buy List.

  Bear markets are unpleasant, but if you’re patient, at least they can give you some bargains.

  That’s all for now. I’ll have more for you in the next issue of CWS Market Review.

  – Eddy

  P.S. Two quick items.

  I recently had a fun chat with Michael Gayed. You can listen to it here.

  Don’t forget to sign up for a premium subscription: $20 per month or $200 for the whole year!

• Morning News: June 28, 2022
  Eddy Elfenbein, June 28th, 2022 at 7:08 am

  Cyber Pirates Prowling Ship Controls Threaten Another Big Shock

  G7 Agrees to Explore Cap on Russian Oil Price

  Widow-Maker Trade Sweeps Tokyo’s Financial Markets Once Again

  Lagarde Plays Down Recession Risks, Says ECB is Ready to ‘Move Faster’ on Rates If Needed

  Central Banks Should Raise Rates Sharply or Risk High-Inflation Era, BIS Warns

  Larry Summers Nailed Inflation. But Is He Right on What Comes Next?

  ‘Uncomfortably High’: What Economists Say About the Chance of Recession

  Less Takeout, More Produce Swapping: How Inflation Is Altering People’s Behavior

  Goldman Sachs and Wells Fargo Boost Shareholder Payouts

  Facing a Surge in Demand, Retailers Limit Emergency Contraceptive Purchases and Deliveries

  Elon Musk Has Twitter’s Data, but Getting Answers on Spam Accounts May Be Tougher

  Netflix Disrupted Entertainment With Binge Viewing. Now Can It Avoid Disruption Itself?

  Nike Earnings Top Wall Street’s Expectations, Despite Inflation in the U.S. and Covid Lockdowns in China

  Can You Blame Poor Countries Like Mine for Turning to China?

  Credit Suisse is Fined for Helping a Bulgarian Drug Ring Launder Money

  EY Pays $100 Million SEC Fine Over CPA Ethics Exam Cheaters

  Be sure to follow me on Twitter.

• The Stock Market Continues to Chill Out
  Eddy Elfenbein, June 27th, 2022 at 11:19 am

  The stock market is up modestly today. As I write this, the S&P 500 is up 0.22%. I think this is a continuation of the “chilling out” theme I’ve discussed. Those big daily changes seem to have gone away, for now. Of course, they can return at any time.

  Energy is the big outlier today. The XLE is up over 3% today while the rest of the market is mostly flat.

  The stock market traditionally gets a nice lift at the middle of the year. June 29 has been the historic turning point. Nearly half of the Dow’s average annual gain has come between June 29 and September 6.

  There’s no guarantee, but that’s the long-term average.

  Not much econ news this morning. Pending home sales rose by 0.7% in May.

  I recently had a fun chat with Michael Gayed. You can listen to it here.

• Morning News: June 27, 2022
  Eddy Elfenbein, June 27th, 2022 at 7:05 am

  Morgan Stanley’s Big Bear Sees Temporary Respite From Selloff

  A $2 Trillion Free-Fall Rattles Crypto to the Core

  The Flamboyant Absurdity of a ‘Late’ or ‘Behind the Curve’ Federal Reserve

  Russia Pushed Into Historic Default By Sanctions

  Russian Gas Cuts Threaten World’s Largest Chemicals Hub

  Oil Giant Finds a Climate Bargain Doing Deals in Some of Mexico’s Poorest Areas

  How A Massive Refinery Shortage Is Contributing to High Gas Prices

  A Shale Booster Shot: ‘Re-Fracs’ Rise as Cheap Way to Lift U.S. Oil Output

  The Quest to Beat High Gas Prices

  Tesla, Ford and GM Raise EV Prices as Costs, Demand Grow

  Icons of Italian Automotive Style Struggle to Go Electric

  How Elon Musk Helped Lift the Ceiling on C.E.O. Pay

  Meme Stock Investors Bet on Bankrupt Revlon Being the Next Hertz

  Amazon’s Prime Day Isn’t Quite the Blockbuster It Once Was

  The Former Electrical Engineer Leading Disney’s Streaming Strategy

  Air Travel This Summer Is Expensive, Messy—and Booming

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• Morning News: June 24, 2022
  Eddy Elfenbein, June 24th, 2022 at 7:01 am

  In Russia’s War, China and India Emerge as Financiers

  China’s Quest for Iron Threatens West African Ecosystem

  Recession Trades Mount as Powell Triggers Rush to Defensives

  Fed Confronts a ‘New World’ of Inflation

  Stocks Temper Their Inflation Expectations on Copper Pounding

  The Strange Art of Asking People How Much Inflation They Expect

  How to Start Investing, Even in a Bear Market

  The SPAC Era Comes to a Whimpering End

  Government to Cancel $6 Billion in Student Loans for Defrauded Borrowers

  FDA Orders Juul e-Cigarettes Off the Market Over Safety Concerns

  The Controversial Economics of Abortion Law

  Hackers Steal $100 Million by Exploiting Crypto’s Weak Link

  As Midterms Loom, Elections Are No Longer Top Priority for Meta C.E.O.

  McDonald’s Tightens Restaurant Ownership Rules as It Looks for New Franchisees

  Netflix Lays Off 300 Employees as Bad Year Continues to Hit Company

  Ken Griffin Moving Citadel From Chicago to Miami Following Crime Complaints

  Accounting Firm EY Grapples With Partner Pay, Bear Market in Breakup

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• Morning News: June 23, 2022
  Eddy Elfenbein, June 23rd, 2022 at 7:08 am

  Europe’s Economy Slows Sharply as Recession Risks Grow

  Korean Currency falls to 13-Year Low Amid Global Recession Fears

  Inflation Surge Earns Monetarism Another Look

  Jerome Powell Takes a Pounding

  How Singapore Got Its Manufacturing Mojo Back

  Companies Brace for Impact of New Forced Labor Law

  Wall Street’s Hiring Frenzy Eases As Worries Grow Over Economy, Market Slump

  What’s A Reverse Currency War and Who’s Fighting One?

  Wall Street Gets Ready to Rumble Over Stock-Trading Rules

  High Energy Prices Could Sink U.S. Stocks During Earnings Season

  Can Crypto’s Richest Man Stand the Cold?

  Should You Buy Now, Pay Later? Tread Carefully.

  Big Changes to 401(k) Retirement Plans Get Closer With Senate Vote

  Bridgewater Builds a $10.5 Billion Bet Against European Companies

  Cost of Owning a Home Surges Above the Cost of Renting One

  Vapers Who Fear Juul FDA Ban Are Rushing to Hoard E-Cigarettes

  7-Eleven Franchisee Who Rebelled Against Company Loses in Court

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• Morning News: June 22, 2022
  Eddy Elfenbein, June 22nd, 2022 at 7:07 am

  One Price Dodging Inflation: China-to-U.S. Shipping Rates

  First Pineapples, Now Fish: To Pressure Taiwan, China Flexes Economic Muscle

  Finding Alternative Route for Ukraine’s Grain Exports Isn’t So Simple, Experts Say

  World’s Largest Truck Maker Says It’s Facing Enormous Supply Chain Pressure

  The World’s Bubbliest Housing Markets Are Flashing Warning Signs

  Britain’s Inflation Crisis Deepens, Fueling Strike Action

  High Gas Prices Hit Demand as Drivers Cut Back at the Pump

  Biden to Call for Three-Month Federal Gasoline Tax Suspension

  Biden Administration Targets Removal of Most Nicotine From Cigarettes

  Big Returns for Investing in Fine Wine and Whiskey? It Was Fraud, U.S. Says

  Once-Hot NFT Collections Tank Alongside Cryptocurrencies

  When You Should’ve Bought Bitcoin, and When It Became a Terrible Idea

  Corporate America Looks for Leeway on U.S. Climate Disclosures

  U.S. Tech Companies Yank Job Offers, Leaving College Grads Scrambling

  Microsoft Plans to Eliminate Face Analysis Tools in Push for ‘Responsible A.I.’

  A 30-Year-Old Heir Is Leading the Makeover of Tiffany’s

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• CWS Market Review – June 21, 2022
  Eddy Elfenbein, June 21st, 2022 at 6:14 pm

  (This is the free version of CWS Market Review. If you like what you see, then please sign up for the premium newsletter for $20 per month or $200 for the whole year. If you sign up today, you can see our two reports, “Your Handy Guide to Stock Orders” and “How Not to Get Screwed on Your Mortgage.”)

  The Worst Market Since 1932

  The good news is that the stock market rebounded on Friday and today. The bad news is that that comes after a very sharp selloff. Last week was the worst week for the S&P 500 in two years, and this is the worst start to a year for the S&P 500 since 1932.

  I know it’s painful, but to borrow from Hyman Roth in The Godfather 2, “this is the business we’ve chosen.” This is what markets do. Every so often, the stock market goes through a stretch where it can’t seem to do anything right. Fortunately, these periods don’t last long.

  For prudent long-term investors, bear markets are very good opportunities. When other investors panic and sell, that usually offers a great chance to pick up bargains. In a bit, I’ll tell you about one of my favorites that just got an upgrade. Wall Street is the only place where a sale is announced and everyone runs out of the store screaming.

  

  One of the important truths of the stock market is that it tends to rise slowly and drop off quickly. The old saying on Wall Street is that bulls walk up the stairs while bears jump out the window. Boy, is that right.

  Today’s surge was a good example of a contra-trend rally. That’s a fancy phrase meaning all that stuff that’s been doing horribly did well today, and all the stuff that’s been doing well did poorly today. Bitcoin did very well today, as did Tesla. I’m not sure how long that will last. As we know, bear market rallies are common and mainly false.

  You could even call this a “double contra-trend rally” because the previous trend was the opposite of the previous rally.

  Confused? I don’t blame you. In this week’s issue, I’ll try to make some sense of what’s going on.

  How to Break Down the Bear

  Not only are bear markets sharp and quick, but even within bear markets, the most painful days are bunched together. The market crash of 2008 is a good example. I need to explain that I follow a slightly different chronology from convention.

  I think it’s better to see the market blowup of 2008-2009 in three segments. There was the “initial selloff” from October 9, 2007 to August 28, 2008. Then came the “panic phase” from August 29, 2008 to November 20, 2008. Finally, there was the “retest phase” from November 20, 2008 until March 9, 2009.

  The initial selloff lasted 224 days and the S&P 500 lost 16.90% (blue line). The panic phase lasted 59 days and the market lost 42.15% (red line). Ouch! The retest phase was 72 days and the market lost 10.09% (green line).

  (There’s nothing official about those phases. I just made them up, but I think it’s a better way to analyze what happened.)

  

  My point is that the panic phase was by far the worst of the worst. By no means do I want to ignore the other two periods, but those were fairly standard lousy markets.

  Which brings me to 2022. I suspect that we just came through our panic phase. In seven days, the S&P 500 lost 11.9%. That’s slightly more than half of the entire bear market (-23.6% through last Thursday).

  In plainer terms, it took more than 100 days to make half of our losses. It took seven days to make the other half. The panic phases are sharp and unpleasant, but they tend to be short-lived. It looks like we may be past ours. The hard part is that we’ll only know for sure in retrospect.

  Historically, the worst parts of a bear market don’t happen at the start. More often, the pattern is that of a slowly rolling snowball that turns into an avalanche. That happened in both 1987 and 1929. As the small losses mounted, the panic spread and those small losses became big losses.

  The market panic of two years ago is an exception. Once the world understood the gravity of Covid, the market quickly tanked. In March 2020, the Dow Jones Industrial Average had two of its worst five days in market history. There’s a famous Variety cover from 1929, “Wall St. Lays an Egg.” The market drop of March 16, 2020 was worse than that.

  The Fed Holds the Key

  How much will the selling go on? That’s impossible to say. The Federal Reserve holds the key. Since 1950, the S&P 500 has had 17 drops of 15% or more. Of those drops, 11 times the market reached its low as the Fed started to lower interest rates.

  For now, the market expects the Fed to hike rates by another 2% before the end of the year. As long as inflation is a threat, then pressure will be on the Fed to raise rates, and there’s no sign that inflation is abating. Companies are feeling the pressure. According to FactSet, 417 companies mentioned inflation during their Q1 earnings calls.

  What really spooked the Fed was the recent report from the University of Michigan on consumer sentiment. It said that households expect inflation to run at 3.3% for the next five years.

  This is major a concern because so much of inflation is self-fulfilling. When consumers expect inflation, they get it. Jerome Powell talks a lot about expectations for inflation. Once expectations take hold, they’re not so easy to change.

  The unpleasant reality is that the Fed has a very poor track record of attacking inflation without causing a recession. To a limited degree, you can say that may have happened in the mid-90s. Outside that, the evidence is not in the Fed’s favor.

  I don’t think an economic inflation is imminent, but the odds of one starting within the next 12 months are high. Goldman Sachs just said it placed the odds at 30%, but that’s an increase from where they had it at 15%. For a recession within two years, Goldman placed the odds at 48%. Historically, stocks have fallen 24% during recessions. We’ve nearly done that without a recession.

  Church & Dwight Is an Ideal Defensive Stock

  Recessions are Wall Street’s most honest auditor. That’s when you really see which companies are strong and which are not.

  Recessions also reveal which companies are closely tied to the economic cycle. During a recession, you want to make sure you own plenty of defensive stocks. These are businesses whose fortunes don’t depend so much on where we are in the economic cycle.

  Speaking of defensive stocks, we had good news today for one of the best defensive names on our Buy List. Shares of Church & Dwight (CHD) were upgraded by Wells Fargo. The firm raised CHD to a buy from neutral.

  Like so many other stocks, CHD has struggled this year. At the start of the year, CHD was close to $105 per share. Lately, it’s been as low as $80 per share. Wells Fargo said that its stable of businesses is poised to withstand any setback in the economy.

  

  Church & Dwight is about as defensive a stock as you can get. The company makes condoms and baking soda. When will that lose demand?

  For Q1, Church & Dwight had earnings of 83 cents per share. That beat expectations of 77 cents per share.

  For the year, C&D sees earnings growth at the low end of their 4% to 8% range. The company said that’s due to the pressures from inflation. For Q2, CHD expects sales growth of 5% to 6% and earnings of 70 cents per share. I think they can beat that.

  While CHD has been selling a lower volume of products, thanks to price increases, revenue is up. Last quarter, net sales increased 4.7% to $1.28 billion.

  Thanks to the upgrade, shares of Church & Dwight rallied 4.6% today. The next earnings report is due out late next month.

  If you want to learn about the other names on our Buy List, then please sign up for a premium subscription: $20 per month or $200 for the whole year.

  That’s all for now. I’ll have more for you in the next issue of CWS Market Review.

  – Eddy

• Morning News: June 21, 2022
  Eddy Elfenbein, June 21st, 2022 at 7:07 am

  Companies Find Leaving Russia Difficult, Though Many Are Trying

  US Sanctions Help China Supercharge Its Chipmaking Industry

  Dutch Government Activates ‘Early Warning’ Because of Russian Cutbacks on Gas

  Italy Says Proposal to Cap Gas Prices Is Gaining Support in EU

  Biden Says He Is Considering Seeking a Gas Tax Holiday

  Are High Prices Unpatriotic or as American as You Can Get?

  Inflation Collides With Growth Fears to Trigger Big Swings in the Bond Market

  Morgan Stanley, Goldman Strategists See More Stock Market Losses

  Goldman Warns US Recession Risk Now Higher and More Front-Loaded

  Crypto’s Latest Meltdown Leaves Punters Bruised and Bewildered

  US Home Prices to Sink by 2023 as Mortgage Rates Hit 6%: Analyst

  Why You Might Buy Your Next Car Online

  Anticipating U.S. Downturn, Elon Musk Details Tesla Staff Cuts

  Kellogg to Separate Into Three Businesses

  Vegas Company Promised Fast Internet. Rural America Waits…and Waits

  Nobel Peace Prize Sold to Help Ukrainian Kids Shatters Record at $103.5 Million

  Be sure to follow me on Twitter.