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  • CWS Market Review – September 11, 2020
    , September 11th, 2020 at 7:08 am

    “It is not the crook in modern business that we fear, but the honest man who doesn’t know what he is doing.” – Owen D. Young

    Summer is slowly retreating, and there’s a new mood on Wall Street. After a very bullish summer and the best August in 36 years, the S&P 500 has lost ground over four of the last five days. Could this be the start of a downward trend?

    That’s hard to say, but the calendar is definitely not on the bulls’ side. September, I’m afraid to say, has historically been a terrible month for stocks. In fact, it’s been the single worst month for stocks over the last 20 years. Not only that, but it’s also been the worst over the last 50 and 100 years.

    I crunched the numbers for the entire 124-year history of the Dow and found that the worst stretch of the year has come between September 6 and September 30. Over that time, the Dow has lost an average of 2%. That may not sound like a lot, but for a 124-year average, it’s pretty big.

    Of course, none of this means that this September will be a bad one. While the market has been soggy lately, it’s been the hi-flying tech names that have felt the most pain. For example, shares of Telsa got hammered because—are you ready for this—it wasn’t selected for addition to the S&P 500. Within one week, the shares dropped by one-third. (Don’t cry for Elon. Tesla’s still up 337% this year.)

    In this week’s issue, I want to take a closer look at some of the key underlying trends in the market and how they affect our Buy List. For the first time in a long time, value stocks are popular and growth stocks are not. I’ll explain what it all means. I’ll also cover some recent economic news. Plus, I have a few Buy List updates for you. But first, is the market finally ready to rotate towards value?

    Value Gets Its Day In The Sun, But Will It Last?

    In recent issues, I’ve talked about the how the market has soared and a small group of stocks has enjoyed the lion’s share of the gains. Lately, however, the bears have pushed back, and it’s been the former darlings of Wall Street that have gotten knocked down. Amazon, Google, Facebook and the others have all gotten dinged hard this month.

    For the first time in a long time, value stocks are popular. I have to explain that growth stocks have been beating value stocks consistently for more than 13 years. Not only that, but the rate of the divergence has sped up noticeably this year.

    Let me quickly explain what I mean by these terms and why the growth-value cycle is so important. A value investor is someone who looks for a large gap between the actual share price and the true underlying value. Of course, calculating the correct value is the hard part. The value investor then hopes the gap closes.

    By contrast, the growth investor isn’t so concerned with price. She sees a stock’s value not in its share price but in its ability for future growth.

    So which is better? Neither. They’re simply different ways to go about selecting stocks. Academic studies have shown that value stocks have, over the long term, been the better bet. We don’t follow either dogma around here, although our Buy List is slightly biased towards value. Or if you want to sound Wall Streety, we have a value “tilt.” Not a big one, but it’s there. I think this is less about value and more that we steer clear of the most speculative names in the growth universe.

    Value stocks tend to be more stable, and they often have higher dividend yields. Value tends to outperform growth when the market tanks. The reason we watch the growth-value cycle is that it tells us about the market’s risk-tolerance level. Once a cycle gets started, it usually lasts for a few years.

    Here’s a 25-year look at the S&P 500 Value Index divided by the S&P 500 Growth Index:

    This one is unusual because it’s run on so long. Every few months, some guru will proclaim that the cycle has finally ended. So far, they’ve all been wrong.

    One problem with growth-value analysis is that the most popular way to categorize growth and value is by a stock’s price/book value, meaning its market price compared with its accounting value. This has caused many banks and energy stocks to be classified as value stocks.

    Just about every major bank has a price/book ratio near 1. The same goes for most of the big energy companies. This is simply due to the accounting realities of operating in those businesses.

    Ideally, the growth and value indexes should tell us about the market’s risk-tolerance level. In the near term, it does that well enough. But the 13-year drought isn’t so much about value and growth. Instead, if reflects the long-term structural problems faced by oil and banking companies.

    I was surprised by how violently the market shifted to value in the past week. Wednesday was a brief counter-attack from growth, but that was quickly halted on Thursday. I’ll cautiously say that this could be a real turning point for the cycle.

    This means that investors should be cautious of stocks with unusually high valuations. Investors should also make sure they have plenty of dividend-paying stocks in their portfolios. Some value names on our Buy List would be financial stocks like AFLAC (AFL) or Globe Life (GL). Silgan (SLGN) and Middleby (MIDD) are also going for reasonable valuations.

    The Economy Is Getting Better—Slowly

    Last Friday, the government released the August jobs report, and it was pretty good. Make no mistake, the U.S. economy is still in rough shape, but we’re gradually improving. During August, the economy created 1.371 million net new jobs, and the unemployment rate fell to 8.4%.

    It’s odd that 8.4% is now considered good news when that would have been the peak during previous recessions. Over the last four months, the economy has created 10.61 million jobs. That’s good news, but the problem is that in the two months before that, we shed 22.16 million jobs.

    The labor-force participation rate is up to 61.73%, which is still very low. Before the pandemic, it was running around 63%. The jobs-to-population ratio is now at 56.5%. It was over 61% at the start of this year.

    Here’s a look at non-farm payrolls:

    The overall message on the economy is that things are rough, but they’re gradually getting back to normal. It will still take several more months, but there is optimistic news out there. This week, for example, Amazon said it’s hiring 33,000 workers and that it’ll have an average compensation package of $150,000 per year. Demand for mortgages is up 40% in the last year.

    Thursday’s initial-claims report came in at 884,000. That was above Wall Street’s estimate of 850,000. Remarkably, that’s the exact same number as last week’s report, after it was revised. The good news is that these are the lowest reports since the crisis started six months ago.

    We’re actually not far from the worst jobless-claims reports of the Great Recession. In early 2009, the reports peaked at 665,000. In 1982, jobless claims got to 695,000.

    From CNBC:

    The four-week moving average for claims through the week of Sept. 5, a number which helps smooth out volatility in weekly numbers, declined 21,750 to 970,750. The moving average for continuing claims fell 523,750 to 13.982 million.

    Claims under the Pandemic Unemployment Assistance program continued to climb, rising more than 90,000 last week to 838,916. The total of those claiming benefits through all programs, though Aug. 22, also rose to just over 29.6 million.

    At the state level, California showed the biggest increase at 17,953, while Florida reported a decline in claims of 9,049, according to unadjusted numbers.

    Continuing claims are now at 13.385 million. That’s after peaking at close to 25 million in May. This week’s continuing claims report is slightly higher than last week’s. The Labor Department said that it changed the way it does seasonal adjustments, so the numbers aren’t precisely comparable.

    The trade deficit is now at a 12-year high. The government also said this week that the budget deficit hit $3 trillion in August. September is the final month in the Federal government’s fiscal year. When the fiscal year is up, the deficit will be about $3.3 trillion, give or take. This will be the first time since World War II that the deficit was larger than the economy.

    Buy List Updates

    Intercontinental Exchange (ICE) has completed its $11 billion acquisition of mortgage-services company Ellie Mae. ICE’s CEO Jeffrey C. Sprecher said, “Ellie Mae’s industry leadership and best-of-breed technology will better enable us to further accelerate the automation of the mortgage-origination workflow, which will benefit stakeholders across the production chain, including consumers.”

    RPM International (RPM) said it will report its fiscal Q1 results before the market opens on Wednesday, October 7. This is for the quarter that ended on August 31. For Q1, RPM expects net sales growth “in low single digits and adjusted EBIT growth of 20% or more.” RPM hasn’t provided any full-year guidance.

    Hershey (HSY) said it’s partnering with Google to target ads towards people are who less likely to go outside for trick-or-treating. The companies claim they can spot a consumer’s willingness to go outside based on their search history. Honestly, it sounds a little creepy, but I understand they need to spend marketing budgets wisely. For Hershey, Halloween represents 10% of its annual sales. It’s not holding back. Hershey plans to spend 160% more than it did last year on digital ads.

    Shares of Disney (DIS) have been performing well lately. Or rather, not falling like everyone else. The movie Mulan is a bona-fide hit. However, Disney is facing backlash because it filmed parts of the movie in areas of China where the government has committed gross human-rights violations.

    Mulan was to be released in March, but it had to be delayed due to the coronavirus. Disney opted to release the movie on its streaming service. For now, Disney is facing a PR nightmare, and it’s their own fault. Even worse, in the credits, Disney thanks the local government. The company should have known better. It’s 2020 and companies need to be more aware of such issues.

    That’s all for now. There are some important economic news and events coming our way next week. On Tuesday, we’ll get the report on industrial production. The retail-sales report comes out on Wednesday. The Federal Reserve meets on Tuesday and Wednesday. The Fed’s policy statement will come out on Wednesday afternoon. Chairman Powell will also hold a post-meeting press conference. Thursday is another jobless-claims report. We’ll also get reports on housing starts and building permits. 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: September 11, 2020
    , September 11th, 2020 at 7:04 am

    China’s Expanded Export Controls Pose Fresh Challenge to Global Tech Industry

    Fear And Frustration: Europe’s Wealthy Keep Wallets Closed

    Hedge the U.S. Election in Currency Markets

    The Dangers of the Fed Aiding Fiscal Policy

    Has Business Left Milton Friedman Behind?

    A Deflationary Mindset That Isn’t In Our Minds

    Rio Shakeout Shows How Powerful Investor Advocacy Has Become

    Citigroup’s Fraser to Be First Woman to Lead a Big Wall Street Bank

    The New ‘Blank Check’ Barons Are Coming for Wall Street

    Tesla Plans to Start Shipping Out Cars Made at Shanghai Gigafactory

    Netflix CEO Says Company Won’t Buy Movie Theater Chain

    Michael Batnick: Most Stocks Suck

    Ben Carlson: The Emotional and Financial Costs of Infertility

    Howard Lindzon: Mental Health – Give Yourself A Break

    Joshua Brown: An Endless Responsibility & The Stupendous Luck Of Bill Gates And Other Money Psychology Fables – With Morgan Housel

    Be sure to follow me on Twitter.

  • Jobless Claims Unchanged
    , September 10th, 2020 at 10:21 am

    This morning’s initial claims report came in at 884,000. That was above Wall Street’s estimate of 850,000. Remarkably, that’s the exact same number as last week’s report, after it was revised. The good news is that these are the lowest reports since the crisis started six months ago.

    We’re actually not far from the worst jobless-claims reports of the Great Recession. In early 2009, the reports peaked at 665,000. In 1982, jobless claims got to 695,000.

    The four-week moving average for claims through the week of Sept. 5, a number which helps smooth out volatility in weekly numbers, declined 21,750 to 970,750. The moving average for continuing claims fell 523,750 to 13.982 million.

    Claims under the Pandemic Unemployment Assistance program continued to climb, rising more than 90,000 last week to 838,916. The total of those claiming benefits through all programs, though Aug. 22, also rose to just over 29.6 million.

    At the state level, California showed the biggest increase at 17,953 while Florida reported a decline in claims of 9,049, according to unadjusted numbers.

    Continuing claims are now at 13.385 million. That’s after peaking at close to 25 million in May. This week’s continuing claims report is slightly higher than last week’s. The Labor Department said that it changed the way it does seasonal adjustments, so the numbers aren’t precisely comparable.

  • Morning News: September 10, 2020
    , September 10th, 2020 at 7:08 am

    Surging Euro Presents E.C.B. With a Dilemma

    WTO Leadership Race Seen as Hostage to U.S. Election

    London Offices Aren’t Refilling Fast Enough for Shops Relying on Them

    Manhattan Apartment Listings Soar, Pushing Vacancies to a Record

    More Americans Are Quitting Their Jobs. That’s a Good Sign

    Wall Street Sees A Bright Side In ‘Healthy’ Tech Selloff

    Do Jobless Benefits Deter Workers? Some Employers Say Yes. Studies Don’t.

    The Other 99.47% Need to Get Back to Work, School and Life

    When ‘Buy American’ and Common Sense Collide

    India Billionaire to Offer $20 Billion Stake in Retail Arm to Amazon

    Amazon Is Hiring 33,000 New Employees With An Average Compensation Package Worth $150,000

    TikTok’s Owner Reportedly In Talks With US to Avoid A Sale of the App

    J.C. Penney’s Landlords Strike Deal to Rescue It From Bankruptcy

    Ben Carlson: Can the 60/40 Portfolio Still Work?

    Michael Batnick: Animal Spirits: Democracy Has Failed

    Howard Lindzon: DraftKings Co-Founder And CEO Jason Robins Joins Me on ‘Panic With Friends’ – We Go Deep on The Struggle and The Future

    Be sure to follow me on Twitter.

  • Growth Inches Back
    , September 9th, 2020 at 4:31 pm

    The market had a nice rebound today. This was a reaction to what we had seen over the previous three days. In other words, Tech was up strongly while Value lagged. By no means does this suggest the rotation to Value is dead. The S&P 500 gained back 29% of what it lost over the three-day skid.

    Today wasn’t the extreme growth tilt that I expected. To be sure, Tech was up the most but areas like Healthcare and Staples put in respectable gains today.

    Our Buy List gained 1.88% today compared with 2.01% for the S&P 500. That’s not bad for a Tech-led day. Compare that with late August when we had several days where we trailed by 50 or 70 basis points.

    Shares of Tiffany lost 6.4% today.

  • The Tiffany Deal Is Off
    , September 9th, 2020 at 11:16 am

    Growth is having a nice rebound this morning which is to be expected following yesterday’s rout. The question is whether this is the start of a long-term rotation or whether it is yet another head fake. We just don’t know yet.

    Growth is beating Value today, but Low Vol is well ahead of High Beta. You don’t see that every day. As I write this, the S&P 500 is up by 1.8%.

    One interesting story this morning. LVMH has decided to scrap its $16.2 billion deal to buy out Tiffany. So what went wrong?

    Tiffany asked to push the deadline back a few weeks. The French government also asked for a delay because of the threat of American tariffs on French-made goods.

    There’s also the angle that the deal was agreed to before the coronavirus hit but it was to be closed during the pandemic. Actually, I’m surprised more deals like this haven’t fallen apart.

    It’s an odd take but the deal wound up in the center of a trade dispute between France and the U.S. The Trump administration had actually rolled back its original plans to tax a wide range of French goods including wine and cheese.

    The Trump administration threatened these tariffs because, they claimed, that France’s new digital tax unfairly targeted U.S. firms.

    They have a point, but the solution may not be the best idea. The French law slaps a 3% tax on revenue that tech companies get from France. The U.S. position is that the law conveniently dings U.S. firms but doesn’t hit areas where French companies are dominant.

    That’s clearly true. The French authorities even referred to the tax as the GAFA Tax for Google, Amazon, Facebook and Apple.

    The French have said they’re willing to repeal the tax if there’s a broader strategy to tax tech companies across economically-developed countries (OECD, Organization for Economic Cooperation and Development). In fact, Macron even said that if American firms wind up paying more taxes now under the French law than they would under a later agreement, then France would chip in to make up the difference.

    For the most part, tech companies and members of Congress support the administration’s policy. The French position is that an American tariff on France is unfair because the U.S. is the one holding up an agreement on taxing tech companies.

    The problem is that the U.S. is so dominant in tech that any tax will disproportionally hurt us. Hopefully, the OECD will come up with a plan to tax these companies. I don’t see how anyone is helped by countries going it alone and risking a trade war.

  • Morning News: September 9, 2020
    , September 9th, 2020 at 7:00 am

    U.S. Businesses in China Not Heeding Trump’s Call to Return Home

    Jerome Powell Channels Alan Greenspan in Putting Stamp on Fed

    The Fed Enabled a Record Expansion. Trump Is Taking Credit.

    The Largest Mortgage Origination Volume on Record

    U.S. Regulator Calls Climate Change A Systemic Risk

    Saudi Arabia Just Crushed U.S. Crude Oil Prices Again

    Natural Gas Is the Rich World’s New Coal

    Pandemic E-Commerce Surge Spurs Race For ‘Tesla-Like’ Electric Delivery Vans

    $16 Billion Tiffany Deal Collapses Over Tariffs

    Trapped by Pandemic, Ships’ Crews Fight Exhaustion and Despair

    ‘Mulan,’ Once a Sure Thing, Becomes a Problem for Disney

    Nick Maggiulli: What Your Psychology Says About Your Relationship with Money

    Michael Batnick: Will Money Printing Cause Inflation?

    Joshua Brown: Tesla Snubbed (!) and the Nasdaq Whale Story

    Howard Lindzon: Panic With Friends – Sean O’Brien Joins Me To Discuss Why Atlanta Is Absolutely Positioned To Be A Top-Tier Venture City

    Be sure to follow me on Twitter.

  • Whither the P/E?
    , September 8th, 2020 at 11:54 am

    Why is the P/E Ratio so darned high? That’s a question that’s bedeviled analysts for many years, not just now.

    As a stock-picker, I generally avoid such arguments. The stock market doesn’t need to “make sense.” The market gods have their reasons for doing whatever it is they do, even if it’s not entirely clear to us mortals. The judgments of the markets are true and righteous altogether.

    The market’s sanity has especially been called into question lately because the market has done well even though the economy has not. The disconnect between Wall Street and Main Street has become a popular talking point.

    As I’ve noted before, this disconnect should not alarm anyone. The stock market and economy have little reason to be strongly linked in the near term. We’ve experienced many such disconnects. One popular idea is that President Trump and, of course, “his cronies” are propping up the market for the election. I’m curious where this cabal was during February and March.

    In any event, Alan Reynolds, a senior fellow at the Cato Institute, is the latest to take on this question. I should add that since Dow 36,000, conservative pundits have not had a particularly stellar track record in discussing market valuations. (By the way, here’s a brilliant critique of Dow 36,000 written by, as it turns out, me.)

    Reynolds writes:

    The argument for stocks being greatly “overvalued” rests on the fact that the trailing P/E ratio rose significantly from May 1 to September 1. On January 1, the P/E ratio was 24.21 –about the same as two years before (24.87). Even after Covid-19 and lockdowns crushed the economy, the P/E ratio was still 23.74 on April 1. Stock prices and earnings had both collapsed in sync. The P/E ratio was 25.10 on May 1 after the Fed funds rate fell to nil and the $1,200 checks and PPP loans peaked. It then rose to 26.69 on June 1, 27.57 on July 1, 28.31 on August 1 and 30.32 on September 1.

    First, Reynolds points out that the inverse of the P/E Ratio, earnings over price, should generally follow bond yields. As bond yields have plunged, valuation should rise. Since the days of Alan Greenspan, this has often been called the Fed Model, though Reynolds believes he may have originally influenced the Maestro. They worked together on Reagan’s transition team.

    Here’s a chart from Reynolds’s post:

    Yes, they certainly do seem to match up. Reynolds also notes that the P/E Ratio falls when inflation rises. Therefore, he claims that Jerome Powell’s Jackson Hole speech, which outlined the Fed’s greater tolerance for inflation, could have been a negative for share prices.

    While Reynolds says the lower bond yields justify the higher equity valuations, he says the Federal Reserve deserves zero credit since they were a laggard on lowering short-term rates.

    The Federal Reserve can certainly crash the market (e.g., the double-dip recessions of 1980-82), but milder forms of Fed activism rarely explain bond yields or stock prices. The 10-year bond yield has at times risen 3.5 to 4 percentage points above the Fed funds rate, as in 1992, 2001-04 and 2010. Also, the S&P 500 stock index hovered at or below 2000 the last time the Fed kept the funds rate near zero in 2014-15, then rose 46% by July 2019 even as the Fed raised the funds target ten times to 2.5%.

    Reynolds then gets to the key point that trailing P/E Ratios are higher but forward ratios may not be. We still don’t know.

    I believe Reynolds errs on two key points. One oversight is noting which stocks are rising. There’s a tendency to treat the S&P 500 as if it’s one giant stock. It’s not. The Big Outside of a small group of tech stocks, the stock rally hasn’t been particularly impressive.

    Here’s the S&P 500 Tech Index (red) along with the S&P 500 except tech (in blue).

    The other point is dividends which are a key component of stock returns. On this point, short-term rates from the Fed have an impact though it’s a limited effect.

  • The Worst Time of the Year
    , September 8th, 2020 at 9:54 am

    Over the last 100 years, September has been the worst month for stocks. It’s also been the worst for the last 50 and last 100 years.

    I’ve crunched the entire 124-year history of the Dow and here’s what the average year looks like:

    You can see there’s a peak at the end of summer. From September 6 to September 30, the Dow has lost an average of 2.01%. That may not sound like a lot but it’s the average of 124 years of data. More than one-quarter of the Dow’s total gain has been wiped in a little over three weeks.

  • Tech Slumps Again
    , September 8th, 2020 at 9:36 am

    Tech stocks are down this morning. The fantastic rally in tech seems to be unwinding. There often seems to be a change in market sentiment after Labor Day.

    Shares of Tesla were again snubbed by the S&P 500. Despite Tesla’s large size (market cap near $400 billion), the index keepers at S&P haven’t added it to their prestigious index. Also weighing on Tesla, GM took a $2 billion stake in Nikola. They’re going to partner together to make a pickup truck. Nikola is up 25% and GM is up 6%. Tesla is down 15%.

    Ahead of Halloween, Hershey (HSY) is partnering with Google to use a person’s search history so they can tailor ads based on whether the person is likely to go out outside or not.

    Hershey will tailor digital ads to households using search data provided by Google to overcome fresh challenges that threaten to derail this year’s Halloween.

    The Pennsylvania-based candymaker struck a deal with Google last month for access to data showing whether people are more or less likely to go outside based on what they search for. For instance, a person who sought out business hours for nearby stores or vacation ideas suggests the likelihood to go outside.

    Honestly, that sounds a little creepy.