CWS Market Review – November 15, 2022
Posted by Eddy Elfenbein on November 15th, 2022 at 6:33 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 S&P 500 Breaks 4,000

The stock market continues its latest rally. Last Thursday, the S&P 500 had a better day than every single day from 1941 to 2001 except for one which was a dead cat bounce after the crash in 1987.

The buying continued today and the S&P 500 broke above 4,000 for the first time in two months. The index is now above its 50-day moving average (the blue line) and it’s getting close to its 200-DMA (green line). This is a good omen for the market. The S&P 500 hasn’t closed above its 200-day moving average since April.

This has been quite a good run. If we measure from the intra-day low from October 13 to Tuesday’s intra-day high, then the S&P 500 has gained more than 15%. Not bad for a little over one month’s work.

As always, let me caution you against getting overly optimistic. The market gods can be cruel and capricious. The last several bear-market rallies have all fizzled, but there is a case that this one may be different.

For one, the market started to move on signs that inflation could be falling. Then last week, we finally got concrete evidence that inflation, if not exactly falling, was tamer than expected. So much of Wall Street is a game of expectations.

On Tuesday, we learned that the wholesale inflation report was also lower than expected. The wholesale inflation report is particularly important because inflation often tends to appear at the wholesale before it trickles down to the consumer level.

For October, wholesale inflation was 0.2%. That was half of what was expected. A big reason for that decline was that the prices for services fell by 0.1%. That was the first decline for services in two years. Over the last year, wholesale inflation is running at 8.0%. Yes, that’s still high but it is a lot better than the 8.4% for the 12 months ending in September.

The rate of consumer inflation peaked at 9.1% in June, and it’s slowly declined — or decelerated — over the last four months. For the 12 months ending in October, consumer inflation was 7.7%.

We had more positive economic news on Tuesday when the Empire State Manufacturing Survey came in at 4.5%. The estimate was for a drop of 6%. We’ll learn even more tomorrow when we get the latest reports on retail sales and industrial production.

Walmart Beats and Raises Guidance

Speaking of retail sales, on Tuesday we got Walmart’s (WMT) earnings report which is the unofficial report on Americans’ consumer spending. In some ways, it might be an even better gauge than what the government provides. Walmart generates an average of more than $1 million in sales every minute.

For the quarter that ended on October 31, Walmart said its sales rose by 9% to $152.81 billion. E-commerce sales rose by 16%. Walmart’s earnings came in at $1.50 per share. That beat expectations by 18 cents per share.

Same-store sales excluding fuel were up 8.2%. The CFO said the holidays are “off to a pretty solid start.” Importantly, the store has been able to improve its inventory glut which has plagued so many businesses.

If you recall, Walmart lowered its outlook over the summer. The problem then was that folks were cutting back on discretionary items because they had loaded up on those things during Covid.

Walmart raised its earnings outlook. To be precise, it said the expected decrease will be less than expected. Thanks to inflation, the low-cost retailer gained market share. On Tuesday, Walmart also announced a $20 billion share buyback. The stock jumped 7% on Tuesday. Walmart isn’t alone. Home Depot (HD) also posted better-than-expected earnings.

This week, Goldman Sachs said it expects a significant decline in inflation next year. The investment house cited improved supply chains, lower wage growth and a weaker market for housing. Goldman expects core PCE to fall to 2.9% by the end of next year.

If Goldman is right, this will have a big impact on the Federal Reserve. The new slogan at the Fed may be “50-50-Pause.”

By that, I mean there’s a good chance that the central bank will raise rates by 50 basis points (or 0.5%) at its December meeting, followed by another 0.5% hike at its February meeting. After that, the Fed may take a pause for a few months. In fact, it could pause for several months. If that’s true, it means we’re not far from the end of this rate-hiking cycle. It’s those higher rate hikes that have weighed on the stock market all year.

This week, Fed Vice Chair Lael Brainard said that the Fed could slow the pace of its rate hikes. While that’s not really a radical idea, it’s interesting to hear it come from a Fed official, and from none less than the vice chair. Brainard said, “I think it will probably be appropriate soon to move to a slower pace of rate increases.”

Not only is the Fed raising rates, but it’s also been paring back on its gigantic bond holdings. So far, the Fed’s balance sheet has contracted by $235 billion. It’s now down to a mere $8.73 trillion.

Stock Focus: Rollins

Here’s a chart of the S&P 500 Value Index (blue) against the S&P 500 Growth Index (black) over the past year. Notice how much better value has done. This tells us how strongly those higher rates impact riskier areas of the market. It’s interesting that the stock market often moves before the event. The Growth/Value cycle changed last year but we didn’t get our first interest rate hike until March.

By the way, we’ve been having a good run with the stocks we’ve focused on in recent issues. In August, I told you about Polaris (PII) and the stock later jumped on a very good earnings report. Also, Ansys (ANSS) and McGrath RentCorp (MGRC) both rallied on good numbers.

The latest is Celanese (CE) which I featured for you two weeks ago. The company actually missed its earnings estimate. For Q3, Celanese made $3.94 per share. To be fair, Wall Street wasn’t expecting much this time. The company said it expected earnings at the low end of its range of $4.00 to $4.50 per share.

We also got the news that Warren Buffett added another 550,000 shares to his stake of Celanese. Last Thursday, the shares vaulted more than 13% and it added another 6% on Friday.

This week, I want to revisit Rollins (ROL) which is another stock I wrote about. I featured Rollins in February when the stock was at $31.03 per share. It’s gained 33.6% since then. For comparison, the S&P 500 is down about 12% over that time.

Rollins is in the pest control biz. It’s amazing how few people know about this stock. Rollins is the parent of Orkin. Years ago, Rollins was a diversified company with lots of holdings. They eventually spun off their oil and gas units into another company. What was left was the pest control business which is a very nice business to own.

Since 2000, shares of Rollins are up more than 6,000%. As it turns out, killing bugs is very profitable. Rollins is able to maintain gross margins in excess of 50%.

I realize that it sounds icky, and it is, but that doesn’t mean it’s a bad investment. Quite the opposite. In his book One Up on Wall Street, Peter Lynch wrote, “Better than boring alone is a stock that’s boring and disgusting at the same time. Something that makes people shrug, retch, or turn away in disgust is ideal.”

Rollins now has 2.8 million customers at 800 locations around the world. During Covid, Rollins cut its dividend by 33% which snapped an 18-year run of consecutive dividend hikes. No worries. Last month, Rollins hiked its dividend by 30%. Over the last 30 years, Rollins has split its stock 3-for-2 eight times. That’s equivalent to one split of 25.6-to-1.

With all this success, you’d think there would be a platoon of Wall Street number crunchers following Rollins. Guess again. ROL is followed by six analysts.

Last month, Rollins reported very good numbers for its Q3. Organic revenue rose 8.6% and earnings increased to 22 cents per share from 19 cents for last year’s Q3. That was a penny more than consensus. I also like that the company has a solid balance sheet. The CEO said, “We continued to see favorable demand for our services with double-digit growth across all major service lines.”

The shares jumped 10% after the earnings report and continued to rally. In three days, ROL gained 16.5%. All thanks to killing bugs.

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

– Eddy

P.S. If you want to learn more about the stocks on our Buy List, please sign up for our premium service. It’s $20 per month, or $200 per an entire year.

Morning News: November 15, 2022
Posted by Eddy Elfenbein on November 15th, 2022 at 7:05 am

Japan’s Economy Shrinks Unexpectedly, Hit by a Weak Yen and Rising Inflation

China’s Economy Takes a Deeper Hit as Retail Sales Turn Negative

Xi’s Crackdowns Drive Chinese Billionaires to Booming Singapore

Biden-Xi Summit Sets Warmer Tone for Complex US-China Dialogue

Europe’s Banks Face ‘Direct Hit’ to Profits from House Price Slide

Russian Oil Exports Hold Up Despite Impending EU Ban

As Europe Quits Russian Gas, Half of France’s Nuclear Plants Are Off-Line

Auto Makers Shift to Lower-Cost Batteries for Electric Vehicles

Sam Bankman-Fried Posts Weird Cryptic Tweets After Wealth Wipeout

FTX Says Number of Creditors in Bankruptcy Could Top 1 Million

FTX Crash Is Eerily Similar to the Bernie Madoff Scandal, Ex-Regulator Sheila Bair Says

TikTok Builds Itself Into an Ads Juggernaut

Meta, Lyft, Salesforce and Other Tech Firms Dump Office Space as They Downsize

U.S. Retailer Home Depot Leaves Outlook Unchanged as Housing Market Slows

Walmart Lifts Annual Forecast, Announces $20 Billion Share Buyback

Walmart to Pay $3.1 Billion to Settle Opioid Lawsuits

Google Pays Nearly $392 Million to Settle Sweeping Location-Tracking Case

U.S. Fines Airlines More Than $7 Million for Not Providing Refunds

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The S&P 500 Gets to 3,999
Posted by Eddy Elfenbein on November 14th, 2022 at 1:27 pm

After a dramatic week last week, the stock market is quiet today. The S&P 500 has been as high as 3,999.31. The bears had just enough strength to push the index away from breaking 4,000.

On our Buy List, shares of AFLAC (AFL) got to a new 52-week high today. The duck stock recently raised its dividend for the 40th year in a row.

Federal Reserve Vice Chair Lael Brainard gave a speech today and she said soon it may be appropriate to slow down the pace of rate increases. That’s not really any sort of radical take on the market, but it’s still interesting to hear it coming from the Fed. In fact, from the vice-chair.

“We have raised rates very rapidly … and we’ve been reducing the balance sheet, and you can see that in financial conditions, you can see that in inflation expectations, which are quite well-anchored,” she said.

Along with the rate hikes, the Fed has been reducing the bond holdings on its balance sheet at a maximum pace of $95 billion a month. Since that process, nicknamed “quantitative tightening,” began in June, the Fed’s balance sheet has contracted by more than $235 billion but remains at $8.73 trillion.

Morning News: November 14, 2022
Posted by Eddy Elfenbein on November 14th, 2022 at 7:02 am

China Plans Property Rescue in Latest Surprise Policy Shift

Some Russia Sanctions Could Extend Beyond Ukraine War’s End, Janet Yellen Says

From Bad to Worse? Next Year’s Economic Risks Are Already Here

U.S. May Skirt Recession in 2023, Europe Not So Lucky – Morgan Stanley

Fed’s Waller Says Market Has Overreacted to Consumer Inflation Data: ‘We’ve Got a Long, Long Way to Go’

What One Importer’s Legal Fight Says About the Power of Cargo Giants

Farmland Values Hit Record Highs, Pricing Out Farmers

Labor Market Mystery: Where Are the Older Gen Z Workers?

As Pandemic Aid Dries Up, Businesses Chase Covid Tax Credit

Electric Vehicles Start to Enter the Car-Buying Mainstream

Fall of the World’s Hottest Stock Cost Sea Founders $32 Billion

FTX’s Freefall Into Bankruptcy Shows Why Case File Is Empty

FTX’s Collapse Casts a Pall on a Philanthropy Movement

JPMorgan Dodges a Buyout-Loan Bullet

‘Black Panther: Wakanda Forever’ Ends Box Office Drought

Pink Floyd Wanted $500 Million For Its Music. What Went Wrong?

Is Time Running Out for the Leap Second?

G-20 Discord Likely to Thwart Efforts to Boost Sagging Global Economy

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Thermo Approves $4 Billion Buyback
Posted by Eddy Elfenbein on November 11th, 2022 at 11:09 am

Thermo Fisher Scientific (TMO) is having a good day. The shares are currently up more than 4%. Yesterday, the company said its board has “authorized the repurchase of $4 billion of shares of its common stock in the open market or in negotiated transactions.” The authorization has no expiration date.

This comes on the heels on another good earnings report. Two weeks ago, TMO said it made $5.08 per share for its Q3. That beat the Street by 27 cents per share. Q3 revenue was $10.68 billion, which includes $440 million in Covid testing.

Thermo also increased its full-year guidance by eight cents to $23.01 per share. The company raised its revenue guidance by $650 million to $43.8 billion. That works out to 12% revenue growth over 2021.

Morning News: November 11, 2022
Posted by Eddy Elfenbein on November 11th, 2022 at 7:02 am

Europe Braces for Recession as Economies Falter

China Eases Quarantine, Ends Flight Bans in Covid Zero Shift

US Finds Others Aligned Against It in Saudi-Sparked Oil Row

After Months of Stubborn Inflation, Glimmers of Hope Emerge

The Lack Of a ‘Red Wave’ Signals a Better Economy

Japan Sets Up Advanced Chip Business With Toyota, Sony

SoftBank Posts Profit of More Than $21 Billion After Selling Alibaba Shares

Credit Suisse Overhaul Draws Scrutiny From Some Investors, Proxy Adviser Over Governance

The Crypto Ponzi Scheme Avenger

The Incredibly Stupid Catastrophe Caused by Sam Bankman-Fried and FTX

FTX Latest: EU License Under Threat as Asset Freeze Fuels Crisis

FTX Crypto Exchange Boss Says He Is Trying to Raise More Money

Two Weeks of Chaos: Inside Elon Musk’s Takeover of Twitter

Musk Warns Twitter Bankruptcy Possible as Senior Executives Exit

Amazon, in Broad Cost-Cutting Review, Weighs Changes at Alexa and Other Unprofitable Units

It’s the New Saying Among Tech CEOs: I Apologize

Adidas Says It Will Relaunch Kanye West’s Shoe Designs Without the Yeezy Name

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Stock Market Soars on CPI Report
Posted by Eddy Elfenbein on November 10th, 2022 at 10:06 am

The stock market is soaring higher this morning thanks to an encouraging CPI report.

For October, consumer prices rose by 0.4%. That was 0.2% less than expected. Over the past year, consumer prices increased by 7.7%.

If we exclude food and energy, then consumer prices rose by 0.3% last month. That was also 0.2% less than expected. In the last year, core prices are up 6.3%.

As soon as the news came out at 8:30 ET, the Dow Jones futures soared 800 points. The S&P 500 is close to its highest close in two months.

Fed watchers have also taken notice. Yesterday, the odds of a 0.75% hike at the Fed’s December meeting were 43%. Now they’re 19%. That’s why stocks are up.

Morning News: November 10, 2022
Posted by Eddy Elfenbein on November 10th, 2022 at 7:01 am

Shrunken Mississippi River Slows US Food Exports When World Needs Them Most

Price of Diesel, Which Powers the Economy, Is Still Climbing

Why Inflation Has Lasted for So Long

What Happens When Americans’ Cash Runs Out

As the Fed Raises Rates, Worries Grow About Corporate Bonds

Regulators Look to Lessen Treasury Market Reliance on Big Bank Dealers

FTX Hurtles Toward Bankruptcy With $8 Billion Hole, US Probe

Is This Crypto’s Lehman Moment?

When Tech Stocks Sputter, the Entire Stock Market Sinks

Tech’s Talent Wars Have Come Back to Bite It

When Your Layoff Has a Hashtag

Work From Anywhere! (Well, Not Really)

Musk’s First Email to Twitter Staff Ends Remote Work

Rivian’s Losses Mount as It Continues to Burn Through Cash

Nio Reports Strong Third-Quarter Revenue as It Gears Up for a Big Year-End Production Push

Carvana’s Earnings Crash Spurs Bond Selloff

Redfin Shuts Home-Flipping Business, Lays Off 13% of Staff in Slumping Housing Market

Disney Has a Disney World Problem, Too

Goldman Sachs’s 80 New Partners Are the Happiest People on Wall Street Today

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Morning News: November 9, 2022
Posted by Eddy Elfenbein on November 9th, 2022 at 7:05 am

China Producer Prices Turn Negative in Warning Sign for Global Economy

China’s Great ‘Zero-Covid’ Guessing Game

Entrepreneur Caught in the Middle of U.S.-China Chip War

Europe Doubles Down on Big Government

Euro Area’s Inflation Shock Weighs Most on Poorest Households

Iran Calls for Deeper Energy, Trade Ties with Russia

Kerry’s Climate Credit Plan Risks Payouts for Carbon-Cutting Mirage

Some Investors Bet Fed Could Lift Rates to Two-Decade High

US Mortgage Rates Rise to 7.14%, Near Highest Level Since 2001

Crypto World Is Rocked as World’s Largest Exchange Rescues Rival

Sam Bankman-Fried’s ‘Emperor’ Aura Makes Downfall a Crypto Stunner

Wells Fargo Embroiled in Yet Another Scandal

Meta to Cut Over 11,000 Jobs; Zuckerberg Says ‘I Got This Wrong’

The Advertising Industry Is Bringing Elon Musk to His Knees

Elon Musk Sells Almost $4 Billion of Tesla Stock After Twitter Takeover

Adidas’ Break-Up with Kanye West Has Halved Its Earnings Forecast for 2022

Disney+ Adds 12 Million Subscribers, but Cites ‘Peak Losses’

AMC Stock Falls After Net Loss Widens. The Meme Trade Needed a Bigger Win.

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CWS Market Review – November 8, 2022
Posted by Eddy Elfenbein on November 8th, 2022 at 8:17 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.”)

Some Cautious Reasons for Optimism

For the first time in a long time, I would call myself an optimist on the stock market. Not that we’re out of the woods just yet, but I sense that the recent selling pressure is overdone.

The market has already thrown several false rallies our way, but the current uptrend may last. The S&P 500 is already up close to 10% since its intra-day low from October 13. The index is also above its 50-day moving average (the blue line in the chart below) which has often been an omen for good returns. Interestingly, the market has historically made several important lows during October.

I don’t want to overstate the case. Of course, we should always be prudent, but there are concrete reasons to be optimistic. For example, the Federal Reserve is probably getting near the end of its rate hikes. In fact, I think rates may be held steady for most of 2023.

Also, the stock market is reasonably priced. It’s been a good thing for disciplined investors to see so many “lockdown darlings” get punished harshly this year. From peak to trough, Peloton lost more than 96% of its value. Stocks like Facebook and Netflix have also been hammered.

Meanwhile, to take an example from our Buy List, Silgan Holdings (SLGN), just hit a new 52-week high. Silgan is going for about 12 times next year’s earnings. The shares are quietly up more than 15% this year. It seems like the more attention a stock usually gets in the media, the worse it’s done this year.

While I think the economy will be in a recession next year, it will probably be a shallow one. Inflation is still a serious problem, but it finally has the attention of people who were quick to dismiss it.

We don’t have all the numbers in yet, but it looks like the S&P 500 will post minor earnings growth compared with last year’s Q3 (though not as much as inflation). This is a very different market than we had only a few months ago. The New York Times quoted Patrick Fruzzetti: “The main thing to remember is that the markets tend to rally post election only because markets don’t like uncertainty.” I have to agree.

On Friday, the government released the jobs report for October, and it wasn’t bad. Last month, the U.S, economy created 261,000 net new jobs. While that’s a decent number, it’s the smallest monthly increase since December 2020.

I don’t mean to dismiss the report. It beat Wall Street’s forecast of 205,000. The stock market opened higher on Friday but then zig-zagged for a bit before closing higher by 1.4%. Not that long ago, a report like that probably would have tanked the market.

The details of the report were somewhat mixed. The unemployment rate rose 0.2% to 3.7%. The labor force participation rate declined for the second month in a row to 62.25%.

The labor force participation rate can be easily influenced by demographic factors such as more retirees. If we look at just the labor force participation rate for prime working age people (ages 25 to 54), that’s 82.5%. That’s not far from where it was pre-Covid.

The frustrating part continues to be wages. For October, average hourly earnings rose by 0.4%. In the last year, average hourly earnings are up 4.7%. That’s the smallest increase in over a year. We need to see this number improve. While many workers are seeing their pay go up, they’re seeing prices go up even more.

The government also tracks a broader measure of unemployment, the U-6 rate. For October, that increased to 6.8%. Here are some more details:

Health care led job gains, adding 53,000 positions, while professional and technical services contributed 43,000, and manufacturing grew by 32,000.

Leisure and hospitality also posted solid growth, up 35,000 jobs, though the pace of increases has slowed considerably from the gains posted in 2021. The group, which includes hotel, restaurant and bar jobs along with related sectors, is averaging gains of 78,000 a month this year, compared with 196,000 last year.

Heading into the holiday shopping season, retail posted only a modest gain of 7,200 jobs. Wholesale trade added 15,000, while transportation and warehousing was up 8,000.

After last Wednesday’s Fed meeting, Fed Chairman Jerome Powell gave a press conference that sounded noticeably more hawkish than the policy statement let on. The financial markets took the cue and sold off. That has passed and the market has gained ground for three days in a row.

For the December 13-14 Fed meeting, futures traders continue to be evenly divided. Half think there will be a 0.5% increase. The other half expects a 0.75% increase. Personally, I’m leaning towards another 0.75% hike. In total, we’re probably looking at another 100 to 125 basis points in further rate increases. After that, I suspect the Fed will pause for several months.

Of course, much of this hinges on the incoming data. The next big test for Wall Street will come Thursday morning when the CPI report for October comes out. The last report showed inflation running at 8.2% over the last 12 months. That’s very high but it’s still below the peak of 9.1% in June.

In the last CPI report, the big problem was that the core rate increased by 6.6% over the last 12 months. That was the fastest pace since August 1982. That’s when the stock market reached rock bottom after a nasty 16-year bear market. Even if headline inflation has already peaked, we may be facing a slow decline.

Ansys and McGrath Rally After Big Earnings Beats

I recently highlighted two stocks for you and both have been doing quite well. This week, I want to bring you updates on both stocks.

In our issue from four weeks ago, I focused on Ansys (ANSS). I’ve always been a big fan of this stock but last year, I thought it got way too pricey. We cut the stock from the Buy List at the end of last year, and I’m glad we did. The stock has had a rough year in 2023. Ansys is down more than 45% this year.

Despite the falling share price, business at Ansys has been doing very well. As we know, a strong business can be a very different animal from a strong stock. In August, Ansys had an earnings report that was very good. Last Wednesday, the company released its Q3 earnings report and it smashed expectations.

For Q3, Ansys said it expected Q3 earnings between $1.56 and $1.70 per share. It turns out that they made $1.77 per share. The CEO said Ansys beat its “financial guidance across all key metrics.” What impressed me is that it’s able to maintain an operating profit margin close to 40%. This is such a good business.

For Q4, Ansys now sees earnings ranging between $2.58 and $2.90 per share. That works out to full-year earnings of $7.48 to $7.90 per share. Wall Street liked what it saw. In the four trading days since the report, Ansys has rallied 9.1%. I haven’t made our Buy List decisions yet for next year, but I’m considering adding Ansys back to our Buy List.

Two months ago, I told you about little McGrath RentCorp (MGRC). The company is in the unusual business of renting relocatable modular buildings, portable storage containers, electronic test equipment and liquid containment tanks. This means things like modular classrooms. Or imagine a construction site in the middle of nowhere. McGrath can rent the foremen an instant office. These things are more common than you might expect. I always like small niche businesses like this.

The odd thing about McGrath is that almost no one follows it, but the company has raised its dividend for 31 years in a row. Earlier this year, the company solidly beat earnings for Q1 and Q2, but I wanted to bring you up to speed on the latest earnings report.

On October 27, McGrath reported very strong numbers for Q3. Sales rose 16% to $200.5 million, and earnings increased to $1.25 per share. That beat by eight cents per share. The stock jumped 11.6% on the news. The shares reached a new all-time high today. In the last 30 years, the stock is up 100-fold.

Here’s a stat that tells you so much about Wall Street. Sixty analysts currently follow currently Meta Platforms. Most have it rated as a buy or a strong buy. Only two analysts follow McGrath.

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

– Eddy

P.S. If you want to learn more about the stocks on our Buy List, please sign up for our premium service. It’s $20 per month, or $200 per an entire year.