Author Archive

• Morning News: May 11, 2022
  Eddy Elfenbein, May 11th, 2022 at 7:03 am

  War and Weather Sent Food Prices Soaring. Now, China’s Harvest Is Uncertain.

  Diamond Prices Are Spiking and Even De Beers Can’t Fill the Gap

  The Dollar Problem: Emerging Markets Count the Costs

  Economists Estimate Rapid Pace of U.S. Inflation Eased in April

  Americans Planning Summer Travel Face a New Hurdle: High Inflation

  Fed Confronts Why It May Have Acted Too Slowly on Inflation

  Lisa Cook is Confirmed as a New Fed Governor

  Fear and Loathing Return to Tech Start-Ups

  TerraUSD Stablecoin Plunges as Crypto Market Awaits Rescue

  BlackRock’s $100 Million Star Trader Turns Bearish Amid Record Losses

  Allianz Hit From Hedge Fund Implosion Reaches $5.9 Billion

  Bolt Built $11 Billion Payment Business on Inflated Metrics and Eager Investors

  Swedish Match Agrees to $16 Billion Takeover by Philip Morris

  Twitter Ad Business Could Surge as Advertisers Pin Hope on Musk

  Netflix Tells Employees Ads May Come by the End of 2022

  NBA Teams Hike Ticket Prices as Attendance Drops, Internal Data Shows

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• CWS Market Review – May 10, 2022
  Eddy Elfenbein, May 10th, 2022 at 7:06 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.”)

  Yesterday, for the first time ever, the nominal price of the Advisor Shares Focused Equity ETF (CWS) closed above the nominal price of the Ark Innovation ETF (ARKK). The former is the ETF that’s based on our Buy List and the latter is the popular ETF run by Cathie Wood.

  

  That’s a massive change of course in a short amount of time. Fifteen months ago, each share of ARKK was going for about four times each share of CWS. Now we’re slightly more.

  I don’t point this out to gloat. I’m a fan and admirer of Wood’s. Rather, I do this to show the incredible dynamics underlying the current stock market.

  Don’t Mistake Rotation for Brains

  Wood’s style of investing is what’s called “factor riding.” She invested in nearly every high momentum stock and held on during a period when those stocks were very popular. Shares of ARKK exploded higher (the red line in the chart above).

  That’s the easy part of factor riding. The problem is when the market turns against you. If your factor is out of style, the market can be merciless as it has been recently. Whenever you hear of easy and quick gains in the stock market, you can usually assume that the person is somehow engaged in factor riding.

  Meanwhile, our style of investing is far more conservative and diversified. That’s why we lagged ARKK before and are leading it now.

  So much of Wall Street is governed by which sectors are hot and which are not. Too often, investors mistake simple rotations for brains. Wall Street loves to jump from one shiny plaything to the next; “to everything there is a season.”

  Yesterday was a terrible day for the stock market, and that came on top of a dismal market. In last week’s issue, I mentioned that the S&P 500 is off to its worst start for the year in 83 years. For the third time in seven sessions, the S&P 500 fell by more than 3%. On Monday, the S&P 500 closed below 4,000 for the first time since March 2021. We closed a hair above it today.

  The S&P 500 peaked on January 3, the first trading day of the year. Official bear markets are typically defined as drawdowns of 20% or more. That means we’ve hit bear territory if the S&P 500 closes below 3,837.25. Today’s low was 3,969.07. Hold on, because we may test the bear level soon.

  As bad as the S&P 500 has been, the Nasdaq has been doing even worse. The Nasdaq Composite fell 4.29% on Monday. By the closing bell, the index was down 27.61% from its November high close. The Nasdaq is already in a bear market.

  Investors need to understand that the market’s rotation is largely related to the Fed’s interest-rate policy. As the Fed has raised rates in response to inflation, the riskier areas of the market have been severely punished. Meanwhile the more conservative sectors are down, but not nearly as much.

  Here’s an update to a chart I ran last week of the S&P 500 Growth versus S&P 500 Value ETFs. You can see just how badly growth stocks have lagged.

  

  Here’s another chart that I think shows a lot. This is the Nasdaq Composite compared with bitcoin.

  

  The correlation isn’t super high, but there’s something there.

  Why is this important? That’s because it shows how the market is treating all risky assets, even fairly disparate ones, as if they’re nearly the same. It’s as if the market is placing everything in one of two boxes. One is labeled “risky stuff” and the other is “everything else.”

  Everything else is winning.

  Last Wednesday, not long after I sent you last week’s issue, the Federal Reserve raised interest rates by 0.5%. There was no surprise there, and the market briefly rallied. On Friday, the market gave it another think and decided it wasn’t happy.

  Markets don’t like higher rates. Even though rates aren’t that high yet, the impact is being felt. This is probably the first in a string of 0.5% rate increases. For a time, the market had been expecting a 0.75% increase at the June meeting. However, Fed Chairman Jerome Powell said that the Fed hasn’t been discussing a rate hike that large.

  Nearly everything that happens in the stock market is a shadow of what’s going on with interest rates. That’s why the bond and currency markets are adjusting as well. The U.S. Dollar Index recently reached a 20-year high. As always, capital goes where it’s treated best. The yield on the 10-year Treasury recently closed above 3%. Both the 5- and 7-year have as well.

  Here’s something interesting: The yield on the 7-year TIPs finally closed above 0%. These are Treasury Inflation-Protected securities which means the return is adjusted for inflation. Two months ago, the same yield was going for -1.33%. The message is that everyone is expecting higher rates. As long as there’s inflation, we’re going to see rates under pressure.

  

  Speaking of which, the next inflation report comes out tomorrow, and it’s been inflation that’s finally woken the Fed up to the damage that it has done. I expect to see another report showing high inflation, although it’s possible that the core inflation number may come in light. The sad fact is that the Fed doesn’t have a good track record of fighting inflation without causing a recession. That’s why so many traders are on edge.

  By the way, May panics aren’t unheard of on Wall Street. The Panic of 1837 lasted from May 8 to May 12. Back then, things got so out of hand that at one point, the New York militia had to be called to Wall Street. The effects of the panic didn’t subside for another seven years.

  The Panic of 1893 started on May 1 and lasted until May 5. That year, over 600 banks went under. There wasn’t any relief until gold was discovered in the Klondike. In other words, the money supply increased.

  While it wasn’t a traditional panic, 82 years ago today was probably the most important day of the 20th century. Germany invaded France, Chamberlain resigned, and Winston Churchill became prime minister. That day the Dow fell 3.4 points, or 2.3%. From May 9 to May 21, the Dow lost 23%.

  During all those panics, the selling fervor eventually subsided; it just took time. The same will happen this time. One of my favorite market quotes is from Shelby Cullom Davis: “You make most of your money in a bear market; you just don’t realize it at the time.”

  Trex Beats the Street

  Investors tend to talk about their big winners and ignore their losers. Well today I want to talk about my biggest loser this year, and that’s Trex (TREX), the deck company.

  Through Tuesday, Trex is down by more than half. If Trex magically jumped 50% tomorrow, it would still be our worst-performing stock this year.

  

  Why am I talking about my disaster with this stock? That’s because I still like it. In fact, I think it’s going for a very good value right now.

  It’s no mystery why Trex is down so much. It’s being lumped in with the housing market and the market is worried about higher mortgage rates wrecking Trex’s business.

  For now, the evidence is that business is going very well. On Monday, Trex released a very good earnings report. (No, they weren’t beating lowered guidance. That’s a favorite trick on Wall Street.) The deck company reported Q1 earnings of 62 cents per share. That’s an increase of 48% over last year, and it was eight cents higher than expectations.

  Quarterly sales rose 38% to $339 million. That was above the company’s own guidance of $320 to $330 million.

  The CEO said:

  “2022 is off to a strong start with Trex Residential posting 40% revenue growth, reflecting a double-digit increase in volume from strong secular trends, as homeowners continue to invest in existing residences and pursue renovations that enhance their outdoor living spaces. Price increases to address inflationary pressures were absorbed by the market and also benefitted net sales. As the category leader with newly expanded capacity, we believe that Trex is capturing more than its share of the ongoing conversion from wood to composite products,” said Bryan Fairbanks, President and CEO.

  For Q2, Trex expects sales to range between $375 million to $385 million. At the midpoint, that’s an increase of 22%. For all of 2022, Trex expects double-digit revenue growth.

  Trex rose more than 5% today. I can’t say that the rout in the stock is over, but the stock is down and business is going well. The market can’t ignore that forever. It’s not easy to stick with a stock that’s caused so much pain, but investing isn’t about emotions. I’m standing by Trex. By the way, if you want to know more about our Buy List stocks and what I think about them please sign up for our premium Substack. We just had a great earnings season.

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

  – Eddy

  P.S. You can get more info on our ETF here.

• Reynolds Earns 26 Cents per Share
  Eddy Elfenbein, May 10th, 2022 at 11:38 am

  The stock market is down again today after being up shortly after the opening bell. Thanks to yesterday’s blow-out earnings report, shares of Trex (TREX) were up as much as 15% today but it’s given back most of those gains.

  We had our final earnings report of this season. Reynolds Consumer Products (REYN) reported earnings of 26 cents per share which matched expectations. Revenues were up 12% to $845 million.

  “We continue growing share in most of our categories and began 2022 with another solid quarter demonstrating our commitment to price leadership,” said Lance Mitchell, President and Chief Executive Officer. “We are innovating and investing in our categories while also recovering profitability in a dynamic environment. I remain exceptionally proud of the RCP team and see tremendous potential for our business.”

  For guidance, Reynolds said it expects earnings to be at the low end of its 2022 guidance range of $1.56 to $1.70 per share. Reynolds is up about 3% in today’s trading.

  The next big market news will be tomorrow morning’s CPI report.

• Morning News: May 10, 2022
  Eddy Elfenbein, May 10th, 2022 at 7:11 am

  OPEC Kingpins Sound Alarm Over World’s Dwindling Energy Capacity

  Japan Has Long Sought More Inflation and a Weak Yen. But Not Like This.

  The Front Line of the U.S.-China Cold War Slices Through Japan

  Stock Market’s Plunge Continues on New Concerns About Global Economy

  Cathie Wood’s Famed Market-Beating Return Is Disappearing

  States Turn to Tax Cuts as Inflation Stays Hot

  For Tens of Millions of Americans, the Good Times Are Right Now

  Housing Supply Is Finally Improving, As High Prices And Rising Rates Weigh On Sales

  Apple’s China Engineers Keep Products Flowing as Covid Shuts Out U.S. Staff

  Truckers Want More Trucks Than Industry Can Build

  Pfizer to Buy Migraine Drugmaker Biohaven in $11.6-Billion Deal

  Philip Morris International in Talks to Buy European Smokeless-Tobacco Rival

  Meta’s First Store Aims to Lure Consumers to The Metaverse

  Tyson Foods Profits Soar as Meat Prices Climb

  Rivian Stock Slumped. Ford Plans to Sell Part of Its Stake.

  Warhol’s ‘Marilyn,’ at $195 Million, Shatters Auction Record for an American Artist

  Be sure to follow me on Twitter.

• The S&P 500 Drops Below 4,000
  Eddy Elfenbein, May 9th, 2022 at 5:33 pm

  Today was another tough day for the stock market. The S&P 500 fell 3.20%. That was its third 3% down day in the last seven days. The index is now down 16.79% from its closing high on January 3 of this year. The S&P 500 closed below 4,000 for the first time since March 2021.

  Once again, the Nasdaq had an even worse day. The Nasdaq Composite fell 4.29% today. The index is now down 27.61% from its November high close. The S&P 500 Energy Sector was the big loser. It lost 8.3% today.

  The defensive sectors did well today. On our Buy List, Church & Dwight (CHD) gained 2.75% today. Overall, our Buy List had a good relative performance day, meaning down but not by as much. For the day, our Buy List lost 1.97% today.

  After the closing bell, Trex (TREX) reported Q1 earnings of 62 cents per share. That’s an increase of 48% over last year, and it was eight cents higher than expectations.

  Sales rose 38% to $339 million. That was above the company’s guidance of $320 to $330 million. This was a very good quarter, and it may bring the shares some much-needed relief.

  For Q2, Trex expects sales to range between $375 million to $385 million. At the midpoint, that’s an increase of 22%. For all of 2022, Trex expects double-digit revenue growth.

• Morning News: May 9, 2022
  Eddy Elfenbein, May 9th, 2022 at 7:00 am

  The Woman Steering Russia’s War Economy

  Seizing an Oligarch’s Assets Is One Thing. Giving Them to Ukraine Is Another.

  China Remains an Outlier in a World of Surging Inflation

  Britain’s Biggest Bank Is Caught in the U.S.-China Crossfire

  Pentagon’s China Warning Prompts Calls to Vet U.S. Funding of Startups

  The Biden Administration Is Capping the Cost of Internet for Low-Income Americans

  Electricity Shortage Warnings Grow Across U.S.

  Contra Simpleton Pundits, ‘the Fed’ Didn’t Cause the Stock-Market Correction

  Everything That Could Go Wrong in Markets as Free-Money Era Ends

  Megacap Optimists Buckle Under Weight of Bear Market

  Bitcoin Flirts With Lowest Level Since 2021 as Equities Drop

  Crypto Critic Nouriel Roubini Is Working on a Tokenized Dollar Replacement

  The Tech Industry’s Epic Two-Year Run Sputters

  Ikea To Spend 3 Billion Euros On Stores As It Adapts To E-Commerce

  Taking On Fast Fashion by Taking It Down

  They Came, They Hiked, They Stayed: Retirees Lift Fortunes in Rural America

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• The April Jobs Report
  Eddy Elfenbein, May 6th, 2022 at 10:24 am

  This morning, the government said that the U.S. economy created 428,000 net new jobs last month. That was a little higher than expectations. The unemployment rate stayed at 3.6%. Wages rose by 0.3% and are now up 5.5% over the last 12 months which is below the rate of inflation. There are now 99 million Americans not in the labor force.

  An alternative measure of unemployment that includes discouraged workers and those holding part-time jobs for economic reasons, sometimes referred to as the “real” unemployment rate, edged higher to 7%. Unemployment for Blacks has showed a steady decline and fell again, to 5.9%, while Hispanic unemployment dropped to 4.1%.

  “The job market continues to plow forward, buoyed by strong employer demand. After just over two years of the pandemic, the job market is remaining resilient and on track for a return to pre-pandemic levels this summer,” said Daniel Zhao, senior economist at jobs review site Glassdoor. “However, the job market is showing some signs of cooling as it turns the corner and the recovery enters a new phase.”

  The labor force participation rate, a key measure of worker engagement, fell 0.2 percentage points for the month to 62.2%, the first monthly decline since March 2021 as the labor force contracted by 363,000. The level is of particularly importance with a gap of about 5.6 million between job postings and available workers.

  The S&P 500 dropped about 2% at today’s open. Today’s low held just above the mid-day low from Monday. That could be a good sign.

• Morning News: May 6, 2022
  Eddy Elfenbein, May 6th, 2022 at 7:04 am

  Ports Race to Clear Cargo, Fearing an Import Overload When China Lifts Lockdowns

  China Danger Strikes Fear Into Global Investors Stumbling on Fed

  China Orders Government, State Firms to Dump Foreign PCs

  Has Shanghai Been Xinjianged?

  The Dollar Is Stronger. Who Wins? Who Loses?

  In More Ways Than One, Fed’s Powell Showed His Strategy This Week

  Why the Fed Waited So Long to Do Something About Inflation

  Ukraine War, Inflation and Covid-19 Keep CFOs on Their Toes Over Forecasts

  U.S. Job Growth Was Sturdy in April, Economists Forecast

  Bankers Quit Jobs for Shot at Riches in ‘Wall Street of Crypto’

  Dubai Aerospace Writes Off $538 Million on Planes Tied to Russia

  Boeing Plans to Move Headquarters to Arlington, Va., From Chicago

  Why Musk’s Twitter Bid Has Shaken Tesla Investors

  Elon Musk’s Fixer Is Quietly Tending the World’s Biggest Fortune

  Facebook Deliberately Caused Havoc in Australia to Influence New Law, Whistleblowers Say

  European Tech Giant Shaken by Bullying Claims, Exodus of Women

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• Morning News: May 5, 2022
  Eddy Elfenbein, May 5th, 2022 at 7:00 am

  China’s Covid Policies Have European Companies Wary of Investing

  Germany’s Military Industry Gears Up to Restock Its Own Forces

  Bank of England Hikes Interest Rates To 13-Year High, Sees Inflation Hitting 10%

  Fed Raises Interest Rate by Half Point, Ratcheting Up Its Inflation Fight

  Fed, Biden Administration Float New Lending Rules for Lower-Income Areas

  American Consumers Are Shopping, Traveling and Working Out Like It’s 2019

  Stock Market Bottom-Fishers Are Trawling Risky Waters

  At 78, Investor Preps for ‘Biggest Bear Market in My Life’

  Elon Musk, Cathie Wood Say Passive Funds Have Gone Too Far

  Elon Musk Secures $7.1 Billion in New Financing for Twitter

  Shell Reports a Record $9.1 Billion Profit

  Shell Takes $3.9 Billion Charge Related to Russia Exit

  Formula One Finally Found a Way to Get Americans to Care

  Companies Confront a New Climate Challenge: Home Offices

  Corporate America Doesn’t Want to Talk Abortion, but It May Have To

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• The Fed Raises Rates by 0.5%
  Eddy Elfenbein, May 4th, 2022 at 2:07 pm

  It’s official. The Federal Reserve raised interest rates by 0.5%. The new target range for Fed funds is 0.75% to 1%. The policy statement said that ongoing increases “will be appropriate.” Starting on June 1, the Fed will start reducing its balance sheet.

  The plan is to ramp up to taking $95 billion off the balance sheet each month ($60 billion in Treasuries and $35 billion in MBS.)

  Although overall economic activity edged down in the first quarter, household spending and business fixed investment remained strong. Job gains have been robust in recent months, and the unemployment rate has declined substantially. Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher energy prices, and broader price pressures.

  The invasion of Ukraine by Russia is causing tremendous human and economic hardship. The implications for the U.S. economy are highly uncertain. The invasion and related events are creating additional upward pressure on inflation and are likely to weigh on economic activity. In addition, COVID-related lockdowns in China are likely to exacerbate supply chain disruptions. The Committee is highly attentive to inflation risks.

  The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. With appropriate firming in the stance of monetary policy, the Committee expects inflation to return to its 2 percent objective and the labor market to remain strong. In support of these goals, the Committee decided to raise the target range for the federal funds rate to 3/4 to 1 percent and anticipates that ongoing increases in the target range will be appropriate. In addition, the Committee decided to begin reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities on June 1, as described in the Plans for Reducing the Size of the Federal Reserve’s Balance Sheet that were issued in conjunction with this statement.

  In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals. The Committee’s assessments will take into account a wide range of information, including readings on public health, labor market conditions, inflation pressures and inflation expectations, and financial and international developments.

  Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michelle W. Bowman; Lael Brainard; James Bullard; Esther L. George; Patrick Harker; Loretta J. Mester; and Christopher J. Waller. Patrick Harker voted as an alternate member at this meeting.