The Taper Is On!
Posted by Eddy Elfenbein on November 3rd, 2021 at 2:02 pm

Here’s the Fed’s policy statement. The central bank says that the taper is on.

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 summer’s rise in COVID-19 cases has slowed their recovery. Inflation is elevated, largely reflecting factors that are expected to be transitory. Supply and demand imbalances related to the pandemic and the reopening of the economy have contributed to sizable price increases in some sectors. 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 and an easing of supply constraints are expected to support continued gains in economic activity and employment as well as a reduction in inflation. 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. In light of the substantial further progress the economy has made toward the Committee’s goals since last December, the Committee decided to begin reducing the monthly pace of its net asset purchases by $10 billion for Treasury securities and $5 billion for agency mortgage-backed securities. Beginning later this month, the Committee will increase its holdings of Treasury securities by at least $70 billion per month and of agency mortgage‑backed securities by at least $35 billion per month. Beginning in December, the Committee will increase its holdings of Treasury securities by at least $60 billion per month and of agency mortgage-backed securities by at least $30 billion per month. The Committee judges that similar reductions in the pace of net asset purchases will likely be appropriate each month, but it is prepared to adjust the pace of purchases if warranted by changes in the economic outlook. The Federal Reserve’s ongoing purchases and holdings of securities will continue to 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.

ADP Payroll Report = +571,000
Posted by Eddy Elfenbein on November 3rd, 2021 at 1:29 pm

The ADP report on private payrolls said that 571,000 new jobs were created last month. Expectations were for 400,000.

Leisure and hospitality, a category that includes bars, restaurants, hotels and the like, saw a gain of 185,000 for a sector that remains well below its pre-pandemic employment level. The sector is seen as a proxy for an economic recovery that stalled over the summer due to a rise in the delta Covid variant and a massive clog in supply lines.

“The job market is revving back up as the delta wave of the pandemic winds down,” said Mark Zandi, chief economist at Moody’s Analytics, which aids ADP in compiling the report. “Job gains are accelerating across all industries, and especially among large companies. As long as the pandemic remains contained, more big job gains are likely in coming months.”

The official jobs report is due out on Friday.

Broadridge Financial Earned $1.07 per Share
Posted by Eddy Elfenbein on November 3rd, 2021 at 12:10 pm

This morning, Broadridge Financial Solutions (BR) said it made $1.07 per share for its fiscal Q1. Analysts had been expecting 99 cents per share. Recurring fee revenue rose 16% to $751 million.

“Broadridge reported strong first quarter results,” said Tim Gokey, Broadridge’s CEO. “Recurring revenues grew by 16%, propelled by revenue from new sales, continued robust governance trends, and our ongoing integration of Itiviti.

With a strong first quarter, Broadridge is on track to achieve our full-year guidance of 12-15% recurring revenue growth and 11-15% Adjusted EPS growth. We are focused on delivering sustainable, long-term growth across our governance, capital markets and wealth businesses, and we remain well-positioned to achieve the higher end of our three-year growth objectives.”

Last year, Broadridge made $5.66 per share. The current guidance comes to $6.28 to $6.51 per share for this year. This is a reiteration of what they’ve said before. The shares are down about 5% today.

Morning News: November 3, 2021
Posted by Eddy Elfenbein on November 3rd, 2021 at 7:02 am

China Coal Surges to End Longest Losing Streak Since 2015

Global Finance Industry Says It Has $130 Trillion to Invest in Efforts to Tackle Climate Change

Bankers Committing to ‘Net Zero’ Don’t Agree on What It Means

ECB “Very Unlikely” to Raise Rates in 2022, Lagarde Says

How “Substantial” Was Progress for the Fed?

As the Fed Prepares to Slow Support, Attention Shifts to Rate Increases

In a ‘Workers Economy,’ Who Really Holds the Cards?

Just When You Think the YOLO Trade Is Done, Another Meme Comes Along

Bed Bath & Beyond Stock Soared 80% After a ‘Short Squeeze’ Was Triggered by Company News

Facebook, Citing Societal Concerns, Plans to Shut Down Facial Recognition System

A Startup Says It Applied to Trademark Meta Before Facebook – But It May Be Willing To Stand Down If Mark Zuckerberg Pays Up

Justice Dept. Sues Penguin Random House Over Simon & Schuster Deal

A Sinking Student Housing Empire

From BTS to ‘Squid Game’: How South Korea Became a Cultural Juggernaut

Wall Street Legend Perelman’s Family Trust Tied to Mystery Loans

Why People In China Are ‘Donating’ Money To Tesla CEO Elon Musk — The World’s Richest Person

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CWS Market Review – November 2, 2021
Posted by Eddy Elfenbein on November 2nd, 2021 at 10:45 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.”)

Today, the Dow Jones Industrial Average closed above 36,000 for the first time in history. This is noteworthy because of a book published 22 years ago called Dow 36,000.

In it, authors James K. Glassman and Kevin A. Haslett argued that the investing world had radically changed and that stock valuations were far too low. They claimed that the Dow, then around 9,000, needed to be four-fold higher to be properly valued.

They weren’t predicting that the Dow would eventually rise to 36,000. Instead, they said that it should be at 36,000 at the time, which was October 1999.

The authors have come in for a lot of ribbing which I think is mostly unfair. Make no mistake – they were completely and totally wrong, but I admire anyone who puts forth a heterodox position, especially so publicly.

These topics are very much what I’m interested in. Twenty-two years ago, I bought Dow 36,000 and read it in one day. My goal was to find the exact mistakes in their theory. I wrote up a book review and shopped it around to different publications. No takers.

This was a shame because I believe I’m the only person who has correctly identified where and how they’re wrong. I had an email exchange with the authors. (One was friendly. The other was not.)

In any event, now I don’t need the approval of a newspaper to get my views to the public. I have a newsletter. Below I’m reproducing my book review from 22 years ago. I should apologize in advance because I go deep into the weeds on some arcane topics so some of it may bore you. Still, I’m proud of what I wrote.

Here it is:

Why the Dow 36,000 Argument Doesn’t Work

Now that the Dow Jones Industrial Average has soared over 4,500 points since Alan Greenspan warned us of the market’s “irrational exuberance,” a mini-industry has evolved of publishing books that attempt to explain the “new market.” The latest addition to the genre is Dow 36,000 by James K. Glassman and Kevin A. Hassett, both of the American Enterprise Institute. To give you an idea of how crowded the field is becoming, two other books are titled Dow 40,000 and Dow 100,000.

Unfazed by the Dow’s stunning climb, mega-bulls Glassman and Hassett have developed their own theory as to why the market has risen so much and why it will continue to rise. Their theory isn’t the usual litany one hears from Wall Street bulls (demographics, triumph of capitalism). Instead, their “36,000” theory goes right to the heart of investment analysis by questioning one of its elemental suppositions: namely, the idea that investments in stocks should demand a premium over investments in bonds due to the riskier nature of stocks. This isn’t split hairs they’re taking on.

Reciting historical data, Glassman and Hassett show that over the long haul, there is no difference between the risks of stocks and Treasury bonds. Therefore, they reason, there should be no risk premium at all. The authors claim that with the risk premium excised from the market, the perfectly reasonable price, or PRP as they call it, for the Dow is 36,000 (more on that later). Mind you, they’re not merely saying the Dow will eventually hit this magic number sometime in the future. Instead, Glassman and Hassett claim that 36,000 is where the Dow ought to be right now. Or more precisely, that’s where the Dow should have been early this year when they started writing the book. Could they be onto something? At the time, the Dow was at 9000.

The Dow very well may head to 36K, but it will have little to do with Glassman and Hassett’s theory. Their theory is seriously flawed due to major methodological errors.

First, Glassman and Hassett err in their selection of an appropriate measure of risk for their purpose. The free market prices risk, just like it prices everything else. That price is included in the price of stocks. In order to measure risk, Glassman and Hassett should use a measurement that isolates risk from the price of stocks. They don’t do this. Instead, they compare the standard deviation of stock returns to the standard deviation of risk-free-bond returns. That’s a different animal. Sure enough, with progressively longer holding periods, stock returns’ standard deviations gradually get smaller. Upon realizing that at long term, the standard deviation of stock returns is the same as bond returns’, actually slightly less, Glassman and Hassett conclude that stocks are “no more risky” than Treasury bonds.

That’s a faulty conclusion. Even if the standard deviations are the same size, it doesn’t say anything about the risk that they’re looking for. The point is, that risk has still never been isolated: It’s inside those returns no matter how long term you go. The variability of risk’s part of all these returns may be diminishing as well. That can happen even if risk stays exactly the same size. With Glassman and Hassett’s method, we have no idea how big the risk inherent in stock ownership is.

Without all the mumbo-jumbo, think of two houses, identical in every way except one has a great view of the river, the other does not. How much does the river view cost? Easy. Compare the prices of the two homes, and the difference must be the price of the view. The fact that the prices paid may deviate from their own respective averages the same way, speaks nothing as to the price of the view. Glassman and Hassett are saying that since those deviations are the same, the river view is free.

Running with this assumption, Glassman and Hassett reason that since risk and reward are related, assets with the same risk will have the same return. Therefore, stocks and bonds will have the same returns. For this to happen, they claim, “the Dow should rise by a factor of four.” How do they get four?

Glassman and Hassett start with the “Old Paradigm” premise that bond returns plus a risk premium equals stock returns. With the risk premium “properly” removed, the yield on Treasuries—meaning their expected return—should be the same as the expected return for stocks. And that’s their dividend yield plus the dividend’s growth rate. So far, so good. Since the sum of these two is now about 1.5% above today’s Treasury yield, the yield on stocks needs to be adjusted downward in order to bring everything into balance. Specifically, it needs to drop from about 2% to 0.5%. With the yield dropping to one-fourth its previous level, stock prices will jump fourfold. Presto. That’s how we get from 9000 to 36000.

Not exactly. The authors have made another mistake. It’s impossible to have a one-time-only ratcheting down of the market’s dividend yield. The reason is that if long-term stock returns don’t change, as the authors do assume, a lower dividend yield will always create a commensurate increase in the dividend growth rate. As a result, there will always be a new higher dividend whose yield will always be in need of being notched back down. And as a result, the dividend growth rate will increase, and the cycle will continue ad infinitum. The correct conclusion from their model is not a one-time-only fourfold increase in stocks, but one-time-only infinite increase in stocks. This means the authors are actually insufficiently bullish and, moreover, they’ve mistitled their book.

Fortunately, the second half of the book is the more valuable by far. Once the authors stop making theories, they start making some sense. In this section, the authors discuss how investors can capitalize on the continuing market boom. The authors estimate the market has another three to five years perhaps before 36K is reached. In any case, their strategies are rather conservative: Buy and hold, diversify, don’t trade too much, don’t let market fluctuations rattle you, don’t time the market. All perfectly sound ideas and not specifically dependent on “Dow 36,000.”

Glassman and Hassett also give the names of stocks and mutual funds they like. There’s nothing wrong with their stocks in the realm of theory, but readers definitely ought to avoid the author’s so-called Perfectly Reasonable Prices, which invite comparison to the famous description of the Holy Roman Empire—not holy, not Roman, not an empire.

I’m not familiar with Kevin Hassett’s former work, but I’ve always liked James Glassman’s investing articles for The Washington Post. His articles are consistently incisive and informative. This book, however, is nothing of the sort. Dow 36,000 contains egregious errors and fallacious reasoning.

Still, I do admire their ambition. With this book, Glassman and Hassett challenged a well-entrenched perception of reality. Being that this perception underwrites trillions of dollars, it’s a very, very, very, well-entrenched perception. Glassman and Hassett lost, and they lost badly. Old paradigms die hard, but they do die.

Me again in 2021. Reading the review again, I wasn’t as clear as I could have been. The older Eddy today would be brief and point out their math error. The authors argue that the market needs a lower dividend yield but they overlook the fact that a lower yield will in turn lower returns going forward.

Mueller Industries Soars to a New High

In June, I told you about Mueller Industries (MLI). At the time, I wrote, “Keep an eye on Mueller. This could be a big winner in the months ahead.” In the last six weeks, Mueller is up 34%. This is one of those little stocks that have delivered tremendous gains, and no one knows about them.

So what does Mueller do? Let’s get to brass tacks…literally.

Mueller is a leading manufacturer of copper, brass, aluminum and plastic products. This is a classic small-cap cyclical stock. Once you realize the scope of their business, you understand that the use of Mueller’s products is seemingly endless. Mueller makes everything from copper tubing and fittings to brass and copper alloy bars and refrigeration valves.

You can find Mueller most anywhere. Some of the companies that rely on Mueller are in sectors like plumbing, heating, air conditioning, refrigeration, appliance, medical, automotive, military and defense, marine and recreational.

Over the last 30 years, the stock is up more than 150-fold.

Mueller is pretty small. The market cap is about $3 billion. Two weeks ago, Muller reported very good earnings.

It helps that the price for copper is going up. Sales rose 59% to $982.2 million. Earnings rose from 76 cents per share for last year’s Q3 to $3.01 per share for this year’s Q3. Those aren’t exactly comparable since Mueller sold off some businesses. The company reduced its debt by $230 million. Even without the business sales, Mueller is doing well. MLI closed at another all-time high today.

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

– Eddy

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No Buy List Earnings Today
Posted by Eddy Elfenbein on November 2nd, 2021 at 9:29 am

There are no Buy List earnings reports today. However, the Federal Reserve begins its two-day meeting today. The central bank will release its policy statement tomorrow afternoon. There are also local elections happening today.

Tomorrow, ADP will release its private payroll report. Then on Thursday, we’ll get another report on jobless claims. That leads us up to Friday when the government will release the official jobs report for the month of October.

The consensus on Wall Street is that the U.S. economy created 450,000 net new jobs last month. Also, economists expect that the unemployment rate to fell to 4.7%.

Morning News: November 2, 2021
Posted by Eddy Elfenbein on November 2nd, 2021 at 7:07 am

Europe Fears That Rising Cost of Climate Action Is Stirring Anger

How Car Shortages Are Putting the World’s Economy at Risk

How the Supply Chain Crisis Risks Taking the Global Economy Down With It

Fed’s Bond-Buying Timeline: Roaring Entry, Boring Exit?

A Cryptocurrency Inspired by ‘Squid Game’ Crashes. The Industry Has Questions.

Earn 7.12% Risk-Free on Your Savings, No Crypto or Junk Bonds Needed

How the Pandemic Has Added to Labor Unrest

J&J, Teva Beat $50 Billion Opioid Case in First Industry Win

Yahoo Quits China, Ending a Rocky Relationship

DuPont to Buy Rogers for $5.2 Billion, Divest Part of Mobility Unit

Tesla Shares Slump After Musk Tweets That Hertz Deal Isn’t Done Yet

Rivian Automotive Targets IPO Valuation Just Above $60 Billion

Zillow Stock Falls Further After Report It Plans to Sell 7,000 Homes for $2.8 Billion

The McRib Is Back at McDonald’s. It’s Also An NFT.

How A Side Hustle Can Boost Performance at Your Regular Job

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Tesla Has Averaged a 1% Gain Every Week
Posted by Eddy Elfenbein on November 1st, 2021 at 12:19 pm

Tesla (TSLA) has gone up 1% per week, on average, for nearly 10 years.

Here’s how I got that. Tesla got to a high of $1154.40 today. On April 12, 2012, TSLA closed at $7.32. That’s a gain of 157.7-fold in exactly 500 weeks. That’s an average of 1.017% every week for 500 weeks. Not bad.

Middleby (MIDD) finally said when it will report its earnings. Their Q3 report will come out next Tuesday, November 9, before the market opens.

On our Buy List, we’ve had new highs today from Intercontinental Exchange (ICE), Moody’s (MCO), Thermo Fisher Scientific (TMO) and Zoetis (ZTS). Also, Abbott Labs (ABT) and FactSet (FDS) are very close to new highs.

I see that shares of Miller Industries (MLR) are creeping higher. The stock is up for the sixth day in a row. On October 5, MLR got to a low of $33.33. It’s up nearly 10% since then. The earnings report is due out on Wednesday.

The ISM Manufacturing Index came out this morning. It dropped from 61.1 to 60.8. That’s still a very good number. Recessions usually don’t happen until the ISM reaches the mid-40s.

The economy is struggling with shortages across industries as global supply chains remain clogged. Supply constraints, which were worsened by a wave of Covid-19 infections driven by the delta variant over summer, helped to restrain economic growth to its slowest pace in over a year in the third quarter.

The motor vehicle industry has been the hardest hit. Outside the shutdown in spring 2020, which severely depressed output, the third quarter was the worst period for motor vehicle production since early 2009. Economists and businesses expect supply chains could remain tight through 2022.

The ISM survey’s measure of supplier deliveries increased to a reading of 75.6 last month from 73.4 in September. A reading above 50% indicates slower deliveries. Longer waits for materials meant high inflation at the factory gate persisted. The survey’s measure of prices paid by manufacturers accelerated to 85.7 from a reading of 81.2 in September.

Barron’s on Fiserv
Posted by Eddy Elfenbein on November 1st, 2021 at 11:54 am

Barron’s recently discussed stocks that are well-regarded on Wall Street but haven’t had a good year. That certainly describes Fiserv (FISV). Some analysts are still bullish on the stock.

Fiserv, for example, has been under pressure in part because of its debt load. But RW Baird analyst David Koning wrote in a recent note that Fiserv’s earnings and revenue growth “will likely be about the best it has been in multiple decades” over the next few years as the company chips away at its debt. While risks persist as the company integrates its 2019 acquisition of First Data, Raymond James analyst John Davis sees a company in the midst of a transformation, with a cheap valuation and prospects for earnings growth in the mid teens for the foreseeable future.

Morning News: November 1, 2021
Posted by Eddy Elfenbein on November 1st, 2021 at 7:00 am

Banks Tried to Kill Crypto and Failed. Now They’re Embracing It (Slowly).

Thiel Says High Cryptocurrency Prices Show Inflation is Real

Inflation, Wage Data, Challenge Fed ‘Transitory’ Narrative

Treasury Set for Own Tapering With $1 Trillion in Debt Cuts Seen

Yellen Dismisses Treasury-Market Jitters, Sees ‘Solid’ Recovery

Metaverse Pioneers Unimpressed by Facebook Rebrand

Who’s Building the Metaverse?

Saudi Aramco Reports a $30 Billion Quarterly Profit as Oil Prices Soar

Russia’s Dirty Gas Is Keeping Europe From Freezing Over

China’s Popular Electric Vehicles Have Put Europe’s Automakers on Notice

Lab-Grown Diamonds Are Latest Victims of China’s Power Crisis

China Locks 34,000 Guests Inside Disneyland for Covid Tests

Angling for a Merry ‘Fishmas’ Despite Global Shipping Delays

Roblox Goes Down, Forcing Children Outside for Halloween

Let’s Put To Bed The Insulting Notion That Elon Musk Is A ‘Crony Capitalist’

Barclays CEO Jes Staley Quits After Investigation into Links with Jeffrey Epstein

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