CWS Market Review – December 28, 2021
Posted by Eddy Elfenbein on December 28th, 2021 at 7:49 pm

(This is the free version of CWS Market Review. In our premium issue, I’ve recently unveiled our Buy List for 2022. To see the new list, make sure you’re a premium subscriber. You can get the premium newsletter for $20 per month or $200 for the whole year.)

The Honey Badger Market

This continues to be the Honey Badger Market. It just doesn’t care. The stock market seems to effortlessly brush aside every problem standing in its way.

Highest inflation in 40 years? No problem.

Supply-chain issues? Move over.

Omicron? Please.

Higher and higher the market goes. Since October 4, the stock market has gained more than 11%. This looks to be one of the strongest quarters for the stock market in years.

Earlier today, the S&P 500 broke through 4,800. Although we closed down by a small bit today, the index is getting close to doubling from its March 2020 low. Who would have predicted that?!

Yesterday, the S&P 500 closed at its 69th record high this year. That’s nearly a record high for record highs. Only 1995 had more.

Not only that, but the Santa Claus Rally is off to its best start in 20 years.

There are lots of definitions for what the Santa Claus Rally entails, but if we say it’s the last week of December and the first two trading days of the new year, then the rally got off to a big start this year.

On Monday, the S&P 500 gained 1.4%. That’s the biggest start to the season in two decades. Every time the Santa Claus Rally has started with a gain of 1% or more, the whole period has been a positive one for the market.

By the way, the S&P 500 first broke 480 on January 31, 1994, nearly 28 years ago. That means that despite all the sturm und drang of the last 28 years, the stock market still rose tenfold, which comes to more than 8.5% per year—and that doesn’t include dividends.

Despite being the final week of trading for this year, this is a slow week for financial news. That will change next week with the December jobs report due out on January 7. There’s a decent chance that the unemployment rate will fall below 4%.

Soon after that, the Q4 earnings season will begin. That’s Judgment Day for Wall Street. Let’s take a closer look at what we can expect.

Preview of the Q4 Earnings Season

What’s the reason for the market’s bullishness? It’s not always so easy to divine the market’s thinking from its behavior. As we know, the market likes to be a bit of a drama queen. Still, I suspect that Wall Street is starting to feel that the upcoming Q4 earnings season will be a good one. After all, Q3 was pretty good.

Also, expectations for Q4 have improved markedly. That’s counter to the usual playbook. Typically, earnings estimates start out too high and are gradually pared back as earnings season approaches. They’re lowered just enough so Wall Street can beat expectations.

Ironically, it’s expected that your company beat expectations. If you merely meet expectations, well…no one saw that coming and your stock can get clobbered. The stock market is all about exceeding expectations.

Let’s look at some numbers. In early 2020, before Covid wrecked the economy, Wall Street had been expecting very good earnings for Q4 of 2021. Of course, it’s always a little sketchy to predict something that far in advance.

For Q4 2021, Wall Street was expecting the S&P 500 to report Q4 earnings of $49 per share. That’s the index-adjusted number (every one point is about $8.5 billion). As Covid set in, the number crunchers on Wall Street lowered their forecasts.

By the start of this year, Wall Street was expecting Q4 earnings of just $44 per share.

Since then, the news has been much better. It’s the twin effects of very diminished expectations and actually good earnings. The S&P 500 earned over $52 per share for both Q2 and Q3. That compares with less than $20 per share in Q1 of 2020. That was a scary time.

According to the latest figures, Wall Street now expects the S&P 500 to earn $50.45 per share for Q4 of 2021. If that’s right, that would be a remarkable turnaround in just a few months. Now you can see what has the stock market so excited. It’s not just fluff. Corporate earnings have improved by an impressive degree.

Here’s a look at the S&P 500 (red line, left scale) and its earnings (black line, right scale. The two lines are scaled and a ratio of 20 to 1. That means whenever the lines cross, the market’s P/E ratio is exactly 20.

Assuming Wall Street’s Q4 estimate is correct (and it’s probably pretty close), then the S&P 500 will have earned $202 per share for this year. For 2022, Wall Street forecasts earnings of $220 per share. That means the S&P 500 is going for 21.7 times earnings. The earnings yield, which is the inverse of the P/E Ratio, is 4.6%.

While that’s certainly low, it’s not out of line when you compare it with the 10-year Treasury which is currently yielding around 1.5%. In other words, the stock market has run up a lot, but there’s been good reason for it. I wouldn’t be so quick to call this a speculative bubble. It’s probably closer to saying that the fear bubble from last year has popped.

Here’s a brief aside. Look at this headline from CNBC:

How would you interpret the news? I would assume that it means that home prices rose 18.4% for the month of October. Right? But that’s not what happened.

Instead, home prices rose 18.4% in the 12 months ending in October. Maybe I’m being pedantic, but that’s quite a big difference between headline and payoff.

Closer Look at Trex

Jack Bogle once said that “reversion to the mean is the iron rule of financial markets.” One exception to that may be Trex (TREX). We added it to our Buy List last year and it was our top-performing stock. During 2020, shares of Trex gained more than 86%.

Instead of reverting to the mean, Trex is having another stellar year, and it looks to repeat as our top-performing stock with a YTD gain of 61%.

If you’re not familiar with Trex, the company is a major maker of wood-alternative decking and railing. In my opinion, what they make looks a lot like wood, but it’s cheaper and involves a lot less maintenance.

Trex is also better for the environment. Pressure-treated wood still dominates which means there’s plenty of room for Trex to grow. It’s also nice to know that with Trex, you don’t have to take another tree out of the Amazon rainforest to make your backyard deck.

Check out their products at their homepage (www.trex.com), and you’ll see why Trex has become so popular.

One of the reasons why I like Trex is their commitment to sustainability. Trex is made from 95% recycled material. Every year, the company effectively takes 500 tons of plastic out of landfills and uses it for alternative wood. It’s not just good for the planet, but it’s smart business.

Trex takes all those used bags and bottles and combines them with recycled sawdust from cabinet and furniture manufacturers – and that’s what Trex is made of. By the way, this also saves a lot of water.

Some other key advantages are that Trex weighs less than wood and is also more resistant to mold and insects. You don’t need expensive staining or sanding, and repairs are much less frequent.

You’ll often hear people say that Trex looks fake. I think that used to be true, but it’s much less the case today. Commercial railing is another big business for Trex. Their railings are especially common at stadiums and arenas across North America.

Trex is sold in 40 different countries and at over 6,700 retailers. The company IPO’d 20 years ago, and it’s been a big winner for shareholders. I don’t think we’re anywhere near the end of this story.

Now let’s look at some numbers. Trex will probably do about $1.2 billion in business for 2021. I think that can rise to $1.4 billion, give or take, in 2022.

For earnings, last year Trex made $1.55 per share. When the final numbers are in for 2021, Trex will have probably made about $2.10 per share. But for 2022, I think Trex can make as much as $2.60 per share. That’s an optimistic forecast, but it’s possible.

Last month, Trex reported Q3 earnings of 64 cents per share. That was six cents higher than expectations and 73% higher than a year ago. Quarterly sales rose 45% to $336 million.

I’ve been impressed by the way Trex is managing itself. On one hand, the company faces higher prices for raw materials and higher labor costs. Trex was able to expand its gross margins by 150 basis points last quarter. Some of these comparisons are distorted because last year was so unusual. The important fact is that Trex has been able to pass along higher prices without damaging sales. There will be more price increases in 2022.

Here’s an interesting stat. On the earnings call, management said that composites have been gaining market share at the rate of 1% each year. Now that’s accelerated to 2%.

Trex said it sees Q4 revenue of $295 million to $305 million. The midpoint is up 31% from last year’s Q4. The company also expects “strong double-digit revenue gains” next year. Trex plans to open a new manufacturing facility on 300 acres in Little Rock, Arkansas.

I like that Trex can maintain an operating profit margin near 25%. That’s very impressive. Also, Trex has a solid balance sheet and doesn’t carry a dime in long-term debt. The price isn’t dirt cheap but there’s a lot of potential for Trex.

That’s all for now. I want to wish everyone a happy and healthy New Year. I’ll have more for you in the next issue of CWS Market Review.

– Eddy

P.S. Don’t forget to check out our ETF.

The S&P 500 Breaks 4,800
Posted by Eddy Elfenbein on December 28th, 2021 at 10:22 am

Yesterday, the S&P 500 reached its 69th new high of the year. It’s still running. The index broke above 4,800 this morning. So far, AFLAC (AFL), Broadridge (BR), Cerner (CERN), Middleby (MIDD), Thermo Fisher (TMO) and Zoetis (ZTS) are at new highs. Seven of our Buy List stocks are up over 40% this year.

This morning’s Case-Shiller Index said that home prices are up 19.1% over the past year. Bill McBride points out that housing inventory is down 60% from the same time in 2019.

Despite being the end of the year, there’s not much news this week. Next week will be more interesting with the jobs report on Friday.

Morning News: December 28, 2021
Posted by Eddy Elfenbein on December 28th, 2021 at 7:05 am

Bitcoin’s Volatility Is on Display Again in Slide Below $50,000

The Libor Era Nears Its End

China Vows Proactive Moves to Stabilize Economy in 2022

Japan’s Factory Output Soars As Car Production Returns

Omicron Variant Is Expected to Dent Global Economy in Early 2022

Gold Edges Higher as Traders Weigh Record Covid-19 Infections

Dubai Can’t Shake Off the Stain of Smuggled African Gold

Santa Claus Rally Is Off To Best Start In 20 years. Here’s What History Says About the Stock Market’s Performance When Rally Starts This Well

Financial Literacy or Luck? The Year Small-Time Traders Made A Big Impact

Food Prices Are Reportedly Expected to Rise Again in January

Farm Aid: Chipotle CEO Brian Niccol on America’s Farming Crisis

The $900 Billion Cash Pile Inflating Startup Valuations

How the Metaverse Won Christmas

Walmart Sparks Public Outcry in China

How to Spot Those Pesky (and Expensive) Lodging Fees

Riot Games to Pay $100 Million in Gender Discrimination Case

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S&P 500 on Pace for 69th Record High this Year
Posted by Eddy Elfenbein on December 27th, 2021 at 11:41 am

The stock market hit a low on Boxing Day three years ago. At its intra-day low, the S&P 500 hit 2346.58. We’ve more than doubled that in three years, though I should note that there were some detours along the way.

The market is up yet again today to yet another new all-time high. We’re on pace for our 69th all-time high close of this year. That’s the most new highs of any year except 1995.

On our Buy List, we have new highs today from AFLAC (AFL) and FactSet (FDS), and Zoetis (ZTS) is close to being a 50% winner this year.

Tech is up the most today while utilities are up the least. Still, the gap between sectors isn’t terribly wide.

Morning News: December 27, 2021
Posted by Eddy Elfenbein on December 27th, 2021 at 7:06 am

Two Decades After Euro, Billions in Old Cash Is Being Hoarded

Turkey’s Lira Slides Amid Questions Over Currency-Defense Tool

China Imposes New Curbs on Offshore IPOs From Restricted Sectors

China to Remove Limits on Foreign Investment in Passenger Car Manufacturing

Bitcoin Mining Entry Triggers a 6,700% Surge in Tech Stock

JPMorgan Says Investors Too Bearish, Doesn’t See Stock Selloff

Record Beef Prices, But Ranchers Aren’t Cashing In

Political Panic Caused Higher Prices, Not the Fed or the Myth That Is ‘Excess Demand’

U.S. Holiday Retail Sales Rise 8.5% As Online Shopping Booms -Mastercard

‘Bubblicious’ Used Car Prices Are Rising Faster Than Bitcoin

Elon Musk’s Big Year and the Roadblocks Ahead

Microsoft Joins GM, Google, Others In Canceling In-Person Participation At CES Due To Rising Omicron Threat

Whole Foods Shoppers Balk at Paying $9.95 Delivery Fee, Orders Plummet

Hollywood Tests the Limit of Marquee Names a Single Film Can Hold

Why Older Women Face Greater Financial Hardship Than Older Men

How Companies – And Employees – Can Avoid A Burnout Crisis

The Single-Staircase Radicals Have a Good Point

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Merry Christmas!
Posted by Eddy Elfenbein on December 25th, 2021 at 6:59 am

I wanted to take this opportunity to wish everyone a Merry Christmas and a happy, healthy and profitable new year.

This has been an incredible year for us. In April, we unveiled a paid newsletter that’s proved to be very popular. Our Twitter following is growing as well.

In September, our ETF turned five years old. I want to thank all our shareholders for their trust and confidence in me. On Thursday, we closed at a record high for the trade shares and the NAV and for total assets.

I also want to thank my tireless editor, Marcia Robertson. She also posts the invaluable morning news links. I also want to acknowledge some of my fellow financial bloggers: Barry Ritholtz, Josh Brown, Cullen Roche, Morgan Housel, Michael Batnick, Howard Lindzon, Ben Carlson, Tadas Viskanta and many, many others for their continued support.

I’d also like to thank the people who follow and interact with me each day on Twitter.

Most of all, I want to thank all of my readers for your continued support.

Let’s hope 2022 brings us more success!

Morning News: December 24, 2021
Posted by Eddy Elfenbein on December 24th, 2021 at 7:01 am

How Long Will Europe’s Gas Crisis Last? Traders Have an Answer

Japan Approves Major Hike in Military Spending, With Taiwan in Mind

Taiwan, Japan Eye ‘All Round Cooperation’ on Chips

As Workers Gain Pay Leverage, Nonprofits Can’t Keep Up

Kraken Exchange CEO Wants You To Borrow Against Your CryptoPunk

GM, Google, Others Join Retreat from CES Over Rising COVID-19 Cases

Amazon Reaches Labor Deal, Giving Workers More Power to Organize

Tesla Puts Brakes on Playing Video Games While Driving

Toys ‘R’ Us Tries to Come Back, Four Years After Bankruptcy

Inside A-Rod’s Sprawling Business Empire

TikTok Tops Google as the Most Visited Website on the Internet

Crocs to Buy Footwear Brand Heydude for $5 Billion

Sidewalk Robots Find Foothold on College Campuses

Buy A Coal Mine, Drive a Gas Guzzler, and Other Uses of Reverse Logic

Beware the Elf on a Shelf, Privacy Watchdogs Warn

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Tracking a New All-Time High
Posted by Eddy Elfenbein on December 23rd, 2021 at 1:19 pm

It’s another good day for the stock market. The S&P 500 is on pace to close at a new all-time high. Within the market, High Beta is continuing its trend over Low Vol for a second day. On our Buy List, we have new highs from Zoetis (ZTS) and FactSet (FDS).

This morning’s jobless claims report came in at 205,000. That’s unchanged from last week. We’re still near the 52-year low we reached two weeks ago.

The government also said that personal income rose 0.4% in November while personal spending rose by 0.6%.

Morning News: December 23, 2021
Posted by Eddy Elfenbein on December 23rd, 2021 at 7:13 am

Why Even a 40% Tax Break Won’t Move Japan’s Employers to Raise Pay

China Cements Rare Earths Dominance With New Global Giant

Manager Who Gained 85% on Distressed Debt Says Beware Evergrande

Bitcoin Worth $15 Quintillion Is Just Another Day in Crypto

Global Oil’s Comeback Year Presages More Strength in 2022

How 2021 Became the Year of ESG Investing

Beneath a Covid Vaccine Debacle, 30 Years of Government Culpability

Consumer Spending Expected to Have Slowed in November

How Shopify Outfoxed Amazon to Become the Everywhere Store

Air Cargo Disrupts Supply Chain as Goods Spill Out of Warehouses

Welcome to the Charles Dickens Luxury Apartments

Want to Buy a Car? You Might Have to Get on a Plane to Claim It.

Ola’s Dream of World’s Biggest Scooter Factory Hits a Hurdle

Intel Apologizes in China After Backlash Over Xinjiang Statement

Spider-Man vs. Omicron

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Q3 GDP Growth Revised Slightly Higher
Posted by Eddy Elfenbein on December 22nd, 2021 at 11:54 am

Yesterday, the High Beta stocks got their vengeance on Low Vol. The market was extremely tilted towards the high-fliers. The High Beta Index gained 4.16% while Low Vol was up only 0.13%. I suppose that’s not a big surprise considering the past five weeks.

Today is much more balanced in early trading. It’s interesting how the S&P 500 has recently bounced off its 100-day moving average.

On our Buy List, shares of Zoetis (ZTS) are up to a new 52-week high. ZTS is now a 45% winner for us. FactSet (FDS) also made a new high.

Also this morning, the government revised Q3 GDP growth up to 2.3%. That’s up from the previous report of 2.1%. Q4 is expected to be much stronger. The Atlanta Fed expects Q4 GDP growth of 7.2%.