Author Archive

• CWS Market Review – September 28, 2021
  Eddy Elfenbein, September 28th, 2021 at 7:54 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.)

  The Fourth Quarter Beats the Other Three Quarters Combined

  The third quarter is coming to an end. That’s good news, at least historically, for Wall Street bulls. Our friends at Bespoke Investment Group point out that the stock market has done better in the fourth quarter than the other three quarters combined. Over the last 20 years, the Dow has gained an average of 4.5% in Q4 compared with just 1.2% for the other three quarters combined.

  My former colleague Gary Alexander notes that if we go back even further to 1950, the S&P 500 has gained 4.64% during the first nine months of the year and 3.95% in the final three months. Clearly, Q4 has been where all the action is.

  What’s the reason for the strong late-year performance? That’s hard to say because it’s probably several variables working together like year-end pension funding and higher consumer sentiment near the holidays. For an odd twist, Q4 has been much stronger in odd-numbered years compared with even-numbered. Perhaps it’s that all the politics of election time holds back the market.

  Speaking of which, the end of the third quarter also means the end of the government’s fiscal year. That brings us yet another battle over the debt ceiling and the government’s funding plans. I won’t go into the endless back and forth, but the politicians will eventually reach some sort of agreement.

  The immediate effect of this has been a recent rise in bond yields. On Monday, the yield on the 10-year Treasury broke above 1.5%. Again, that’s a pretty low rate but consider that the 10-year was yielding 1.09% earlier this year. A little over a year ago, the 10-year would fetch you about 0.5%. In other words, investors were so unnerved during early Covid that they were willing to lend their money for 5%, for 10 years combined.

  The yield on the two-year Treasury has crept up as well, and it recently broke above 0.3%. That’s up from 0.13% in early June. It’s odd that people are freaking out about micro rises in bond yields, but that’s how the bond market thinks. Here’s the chart that has people scared:

  

  The two-year Treasury is interesting to watch because it’s considered to be one of the leading indicators of Fed policy. The futures market is currently split on whether the Fed will raise rates sometime in the next year. Personally, I’m a doubter but I like to keep an open mind.

  Long-time readers will know that I’m a big fan of the 10/2 spread. This is simply the difference in the yield between the two-year and ten-year Treasuries. In a more just world, the 2/10 would have won a shelf full of Nobel prizes because it’s got a much better track record than just about anyone.

  Lately, the 2/10 spread has narrowed, meaning that’s less optimistic for the future of the U.S. economy. In late March, the spread got up to 159 basis points. That was the highest in nearly six years. Indeed the 2/10 was right again—the U.S. economy was humming along. In fact, the biggest problem was finding enough workers.

  But now the 2/10 is below 120 basis points. While that’s not a huge move, it does warrant some attention. Wall Street has been cutting back on their estimates for economic growth. In May, a survey of economists had been expecting Q3 economic growth of 6.6%. That’s now down to 4%.

  The survey also showed that the fear of inflation is still with us. The economists expect the year-over-year inflation rate to hit 5.1% during Q4. In May, they had been expecting just 2.8%.

  Breaking Down Today’s Loss

  The stock market got pushed back today for a loss of just over 2%. This was the worst day for the market in four-and-a-half months. The Nasdaq had its worst day since March. For the numerologists among you, the Dow closed at 34,299.99. (I don’t know what that means but I assume it’s very important to some market watcher.)

  

  It seems that the jitters we first saw last Monday are still with us. In particular, the hardest hit stocks today were the ones that had been doing very well. For example, Google (GOOG) and Microsoft (MSFT) were both down over 3.6% despite no important news impacting either company. It’s as if some traders decided that the hi-fliers had to be punished.

  The damage is spreading. If we look at the S&P 500, 262 members of the index are now more than 10% below their 52-week high. The traditional definition of a market correction is when the entire market is 10% below its high. It’s almost like we’re having a stealth correction. In fact, sixty-seven stocks in the index are more than 20% off their high.

  There are only two more trading days this month and it looks like the S&P 500 will have its worst month since last September. Even with today’s loss, the S&P 500 has notched 37 daily losses this year of more than 1%. Compare that to last year when we had 109 such days.

  Stock Focus: RPM International

  This week, I want to look at a former Buy List stock. I still like the company and it still has many of the characteristics that I look for. RPM International (RPM) is a seemingly dull stock, but once we dig below the surface, we see a very sound and profitable company. This may not be a household name, but it will be better known.

  The name certainly isn’t very interesting, nor does it suggest what they do. RPM owns several subsidiaries, and the bulk of their business is focused on making high-performance specialty coatings, sealants and building materials. This is an important business, and it can be quite profitable.

  Want proof? Check out RPM’s long-term stock chart:

  

  That’s up 12-fold in 12 years. I also like that RPM has increased its dividend every year since 1973. There aren’t many stocks that can boast a track record like that!

  If it’s so great, why did we boot it from the Buy List? Well, that was a tough decision, but I think I made the right call. We had it on our Buy List for four years and rode it to a gain of nearly 70%, not including dividends. However, their business was slowing down and I thought that stock was too rich. It looks like I was right. Shares of RPM are currently down more than 13% this year. Of course, that makes it more attractive again.

  I also wanted to highlight RPM because it’s reporting earnings next week and I’m not sure where I stand on the stock. More on that in a bit. Probably RPM’s best-known brand is Rust-Oleum. For the last fiscal year, RPM did over $6.1 billion in sales. The company currently has 15,500 employees who are spread across 26 countries. RPM has 156 manufacturing facilities. RPM is also the fifth-largest paint and coating company in the world.

  Let’s look at some financials. In July, RPM reported fiscal Q4 earnings of $1.28 per share. That matched Wall Street’s estimate. This was for the three months ending on May 31. For the year, RPM increased its EPS from $3.87 to $4.16. That gives them a trailing P/E Ratio of 19, which isn’t particularly cheap. The company said it expected to see double-digit sales growth for Q4. They sold themselves short. RPM nearly hit 20% sales growth for the quarter.

  For Q4, EPS grew by 13.3% and the company had record cash from operations of $766.2 million. That was driven by “margin improvements and good working capital management.”

  Let’s break it down a little more. RPM’s business is divided into four groups. For Q4, Construction Products had a sales increase of 33.2%. Performance Coatings rose by 20.5%. The Consumer Group was up just 2.0%. Specialty Products, the smallest group, was the star as sales jumped 49.9%.

  RPM is due to report its fiscal Q1 earnings next Wednesday, October 6. The company has really watered down its outlook. RPM said it expects sales growth in the “low- to mid-single digits.” That’s a lot lower than I expected. As I said, I’m glad we sold but I pay attention when good stocks hit a rough patch. Perhaps RPM is trying to manage expectations. That’s an old Wall Street game: talk down expectations and then act surprised when you “beat” them.

  Wall Street expects RPM to report earnings of $1.03 per share. If RPM tops that significantly, then I’ll be very interested in adding them to the portfolio, especially if they provide optimistic guidance.

  This is a time where I wish I could be more emphatic, but I simply can’t. RPM has the potential to be a good buy but all the pieces aren’t in place just yet.

  I need to mention RPM’s amazing dividend track record. As I mentioned before, RPM has increased its dividend every year since 1973. The current quarterly dividend is for 38 cents per share. That works out to a dividend yield of just under 2%. I think we can expect to see dividend increase #48 come next week. Even in tough times, RPM is rewarding its shareholders. This is an excellent company that’s thriving in a difficult environment.

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

  – Eddy

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• FactSet Earns $2.88 per Share
  Eddy Elfenbein, September 28th, 2021 at 11:31 am

  We had a very good earnings report this morning from FactSet (FDS). This was for their fiscal Q4.

  The company’s previous guidance implied fiscal Q4 earnings of $2.43 to $2.83 per share. Wall Street was expecting $2.72 per share. Instead, FactSet made $2.88 per share. That’s quite good.

  For the year, FactSet made $11.20 per share which exceeded their range of $10.75 to $11.15 per share. This was the 25th year in row that FactSet has increased its EPS.

  “We delivered a record fourth quarter, driving 200 bps of ASV growth for the fiscal year,” said Phil Snow, CEO, FactSet. “As we planned, two years of accelerated investment in content and technology is paying dividends. We enter next fiscal year with momentum and believe our strategy to scale our content refinery and create personalized workflow solutions will increase our market share.”

  FactSet also gave initial guidance for the new fiscal year. The company expects FT 2022 earnings to range between $12 and $12.30 per share. The stock is currently up 3.8% in today’s trading.

• Morning News: September 28, 2021
  Eddy Elfenbein, September 28th, 2021 at 7:10 am

  China Energy Crunch Triggers Shutdowns, Pleas for More Coal

  Power Outages Hit China, Threatening the Economy and Christmas

  Brent Oil Soars Above $80 as Global Energy Crunch Shakes Markets

  The Country That Makes Breakfast for the World Is Plagued by Fire, Frost and Drought

  U.S. SEC Cracks Down a Second Time on SPAC Equity Accounting Treatment

  U.S. Commerce Chief to Push Investment in Domestic Economy

  John Authers: It’s Time to Watch the Bond Market Closely Again

  Fed Officials Under Fire for 2020 Securities Trading Will Resign

  Crypto Exchange Says $24 Million ‘Fat-Finger’ Trade Being Undone

  ‘Developers Are the New Bankers’: Wells Fargo Analysts Predict Wave of Job Cuts

  Wall Street Scans the Lots as Used Cars Prod Inflation

  Ford Will Build 4 Factories in a Big Electric Vehicle Push

  Mastercard Rolls Out Buy Now, Pay Later Program

  Activision Blizzard Strikes An $18 Million Deal Over Its Workplace Harassment Lawsuit

  Facebook Is ‘Pausing’ Instagram for Kids. Here’s Why Mark Zuckerberg Allows Screen Time for His Daughters

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• The 10-Year Yield Retakes 1.5%
  Eddy Elfenbein, September 27th, 2021 at 11:46 am

  The 10-year Treasury yield crossed above 1.5%. That’s getting a lot of attention this morning. Just a few weeks ago, the 10-year yield was below 1.2%. For some context, the 10-year yield was last at 1.5% in late June, so we’re really not seeing a massive turn. At least, not yet.

  

  The stock market is cautiously lower this morning, although the Dow is up. This is the start of the final week of the third quarter. We’re seeing a familiar pattern where Energy stocks are doing the best while the rest of the market is pretty much flat. It’s still early.

  Later today, two Fed officials, Lael Brainard and John Williams, will be speaking about the economy. The former is sometimes mentioned as a replacement for Jerome Powell. The latter is the head of the New York Fed, which is first among equals at the Fed.

  This morning we learned that despite supply constraints, durable goods rose sharply last month. Wall Street had been expecting an increase of 0.6%. Instead, durable goods orders rose by 1.8%. That’s the largest increase since May. This was the 15th increase in the 16 months since the economy reached rock bottom.

  Core capital goods, which excludes aircraft, rose by 0.5%. Over the last year, durable goods orders are up close to 25%.

  

• Morning News: September 27, 2021
  Eddy Elfenbein, September 27th, 2021 at 7:08 am

  Evergrande Pain Spreads to Wealthy Investors as More Interest Payments Missed

  How China Plans to Avert an Evergrande Financial Crisis

  China Supplants Fed as Biggest Risk for Emerging Markets

  Cryptocurrency Exchanges Scramble to Drop Chinese Users After Beijing’s Ban

  Economists, Business Relieved No Left Alliance After Germany Vote

  U.K. Offers Thousands of Visas to Foreign Truckers to Ease Driver Shortage

  Scotland’s Oil Industry Is Fading as Wind Energy Beckons

  Europe’s Energy Crisis Is Coming for the Rest of the World, Too

  Goldman Sachs Hikes Oil Forecast to $90, Citing `Most Bullish Hurricane in History’

  Europe’s IPO Market Roars Back to Life But Where Are the SPACs?

  Robinhood Hits Campus, Where Credit Card Companies Fear to Tread

  Wall Street Scans the Lots as Used Cars Prod Inflation

  Goldman Sachs, Ozy Media and a $40 Million Conference Call Gone Wrong

  Gores Guggenheim SPAC Nears Deal to Combine With Polestar

  How PayPal’s Founder Became the Most Feared Man in Silicon Valley

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• Morning News: September 24, 2021
  Eddy Elfenbein, September 24th, 2021 at 7:03 am

  An Insider Details the ‘Black Box’ of Money and Power in China

  China Says All Crypto-Related Transactions Are Illegal

  ECB’s Lagarde Warns Energy Price Pressures Could Outlast Covid Supply Shocks

  Traders Go All In on BOE Winning Rate-Hike Race Versus Fed

  The Return of Empty Shelves and Panic Buying

  As Debt Default Looms, Yellen Faces Her Biggest Test Yet

  The U.S. Could Run Out of Cash to Pay Its Bills as Early as Oct. 15, Analysts Say

  Wall Street Eyes Four More Years for Powell at Fed

  Biden’s Pick for Bank Regulator Worries Banks Are Getting Too Powerful

  White House Prods Companies on Chips Information Request

  Amazon Working on Large Wall Echo, Sound Bar and New Auto Device

  Mercedes-Benz Plans $8.2 Billion Battery Venture

  China Evergrande Never Got Auditor Warning Despite Big Debt Load

  Costco Reports Double-Digit Sales Growth in All Segments

  The Future of Work Should Mean Working Less

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• Morning News: September 23, 2021
  Eddy Elfenbein, September 23rd, 2021 at 7:05 am

  Chinese Property Debt Issuers Face ‘Evergrande Premium’ As Worries Mount

  Evergrande Debt Crisis Is Financial Stress Test No One Wanted

  Beyond Evergrande’s Troubles, a Slowing Chinese Economy

  ECB Braces for Sticky Inflation; Eyes End of Emergency Stimulus

  The Monte Paschi Crisis Could Be Good for Europe

  Federal Reserve Signals a Shift Away From Pandemic Support

  In Push to Tax the Rich, White House Spotlights Billionaires’ Tax Rates

  JPMorgan Team Says Flows Show the Buy-the-Dip Mantra Is at Risk

  Private Equity Party Is Ending and We’re Exhausted, Carlyle Says

  Robot Crypto Traders Are the New Flash Boys

  Toast, Freshworks Make Strong Market Debuts

  California Governor Signs Bill Targeting Amazon Warehouse Quotas

  Facebook’s Chief Technology Officer to Step Down in 2022

  Chip Shortage Expected to Cost Auto Industry $210 Billion in Revenue in 2021

  Rural America’s Roads Might Resemble Cuba in 20 Years

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• Today’s Fed Policy Statement
  Eddy Elfenbein, September 22nd, 2021 at 2:02 pm

  Here’s the Fed’s policy statement:

  The Federal Reserve is committed to using its full range of tools to support the U.S. economy in this challenging time, thereby promoting its maximum employment and price stability goals.

  With progress on vaccinations and strong policy support, indicators of economic activity and employment have continued to strengthen. The sectors most adversely affected by the pandemic have improved in recent months, but the rise in COVID-19 cases has slowed their recovery. Inflation is elevated, largely reflecting transitory factors. Overall financial conditions remain accommodative, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses.

  The path of the economy continues to depend on the course of the virus. Progress on vaccinations will likely continue to reduce the effects of the public health crisis on the economy, but risks to the economic outlook remain.

  The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. With inflation having run persistently below this longer-run goal, the Committee will aim to achieve inflation moderately above 2 percent for some time so that inflation averages 2 percent over time and longer‑term inflation expectations remain well anchored at 2 percent. The Committee expects to maintain an accommodative stance of monetary policy until these outcomes are achieved. The Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and expects it will be appropriate to maintain this target range until labor market conditions have reached levels consistent with the Committee’s assessments of maximum employment and inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time. Last December, the Committee indicated that it would continue to increase its holdings of Treasury securities by at least $80 billion per month and of agency mortgage‑backed securities by at least $40 billion per month until substantial further progress has been made toward its maximum employment and price stability goals. Since then, the economy has made progress toward these goals. If progress continues broadly as expected, the Committee judges that a moderation in the pace of asset purchases may soon be warranted. These asset purchases help foster smooth market functioning and accommodative financial conditions, thereby supporting the flow of credit to households and businesses.

  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; Thomas I. Barkin; Raphael W. Bostic; Michelle W. Bowman; Lael Brainard; Richard H. Clarida; Mary C. Daly; Charles L. Evans; Randal K. Quarles; and Christopher J. Waller.

  Here are the economic projections.

  The Fed cut back on its economic growth forecasts for this year but increased them some for next year.

  As far as inflation goes, the Fed sees 4.2% inflation for this year, but only 2.2% for next year. (The Fed follows the PCE numbers, not the CPI.)

  There are now nine votes for a rate hike next year (out of 18). In June, there were only seven votes. Of those nine, three see the need for two rate hikes in 2022.

  Going out to 2023, the median Fed vote sees a second and third hike but the members are evenly divided on a fourth hike (nine say yes, nine say no).

  For 2023, the Fed sees a fifth hike and is again evenly divided on a sixth hike.

• Analyst Says Disney’s Selloff Is Overblown
  Eddy Elfenbein, September 22nd, 2021 at 9:55 am

  Alexia Quadrani of JPMorgan has been bullish on Disney (DIS). The stock got pinged yesterday for a 4% loss, but Quadrani is still a fan. CEO Bob Chapek said they expect to add “low single-digit millions” of Disney+ subs for Q4. The stock lost $14 billion in market cap.

  JPMorgan analyst Alexia Quadrani, who has a price target of $220 on Disney, reiterated her overweight rating.

  “We remain very encouraged by the growth outlook for Disney+ and are not concerned with this modest shortfall versus expectations,” Quadrani said in a research note.

  “More positively, the parks only saw a brief impact from the delta variant and bounced back very quickly following Labor Day.”

  Overall, the analyst said she views the selloff as “overdone” and sees “the current price as an attractive entry point as the robust growth in [direct-to-consumer] subscribers should ultimately be positive for [the] shares over the long term.”

  Quadrani has a price target of $218 per share. Disney is currently up $2.67 to $173.73.

• Morning News: September 22, 2021
  Eddy Elfenbein, September 22nd, 2021 at 6:32 am

  Iron Ore Storms Past $100 as China Soothes Evergrande Concerns

  Global Traders Given Evergrande Reprieve as PBOC Adds Liquidity

  John Authers: Evergrande Isn’t a Lehman. Now for the Bad News

  Uneven Global Vaccination Threatens Economic Rebound, O.E.C.D. Warns

  Pressure Grows on U.S. Companies to Share Covid Vaccine Technology

  Democrats Pursue Doomed Debt Move, With Emergency Option in Hand

  Crypto Risks Existential Threat as U.S. Crackdown Gathers Steam

  Fed’s Taper Timing Runs Into China’s Crackdown, Debt-Ceiling Politics

  American Airlines and JetBlue Face Antitrust Suit Over Alliance

  German Auto Giants Place Their Bets on Hydrogen Cars

  No More Apologies: Inside Facebook’s Push to Defend Its Image

  Google to Spend $2.1 Billion on Manhattan Office Building

  After 92 Years, Fortune Will Have Its First Female Editor-in-Chief

  Ball in MGM’s Court After Entain Soars on DraftKings Bid

  Woke Ben & Jerry’s Releases Anti-Cop Flavor with Rep. Cori Bush

  Amazon’s Labor Shortage Solution: Relax Cannabis Testing

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