• CWS Market Review – September 21, 2021
    Posted by on September 21st, 2021 at 8:49 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.)

    Before I get to today’s newsletter, I want to mention that today is our ETF’s fifth birthday. The AdvisorShares Focused Equity (CWS) started trading five years ago today. Over that time, we’ve nearly doubled investors’ money, and we’ve done it with low turnover and a long-term focus.

    Lots of ETFs fold each year but we’ve still going strong. Thanks to everyone for your support and here’s to many more years!

    The Market Stumbles

    Yesterday, the stock market suffered its worst loss since May. To be honest, the drop wasn’t so bad. By the closing bell, the index shed 1.70%. For some context, we had 31 days worse than that last year, which admittedly was an unusual year.

    When I say that yesterday was the worst day in over two months, that really says more about the last two months than it does about today. The true market outlier wasn’t yesterday’s drop but how calm the market has been for the last several weeks. In fact, yesterday’s market was cushioned by a late-day rally. At one point, the Dow was down 971 points, and the S&P 500 was off by 2.87%. We were down again today, but only by a small bit.

    Yesterday’s market was also a near-perfect environment for our Buy List to outperform the rest of the market. All told, our Buy List lost 0.97% yesterday. That’s a big outperformance for our portfolio which is well diversified.

    The reason we did so well in a relative sense is that our Buy List is concentrated in many high-quality conservative stocks. Five of our stocks actually closed higher yesterday while 19 of our 25 stocks beat the market.

    Let me stress that one-day performance doesn’t tell us how good a portfolio is. Instead, I mean to say that our portfolio is designed to do better under certain conditions. To be fair, there are days when our kinds of stocks are on the outs. That’s simply how the market works. To everything, there is a season. It always sounds odd to talk about outperformance on a down day, but I’ve found that the best portfolios really make their mark during tough markets.

    Yesterday was also the first time that the S&P 500 closed below its 50-day moving average on back-to-back days since last October. That’s the longest such streak in 25 years. Bloomberg said that yesterday, the 500 richest people in the world lost a combined $135 billion. Elon Musk lost $7.2 billion. The poor chap is no longer a $200 billionaire.

    If you’re not familiar with the 50-day moving average, it’s simply the average closing price for the last 50 trading days. There’s also a 200-day version, plus others. I like to think of the 50-DMA as a stupid metric that works for very smart reasons.

    Why is this so? The stock market tends to be trend-sensitive. A rising market will generally tend to keep rising and a lousy market will tend to stay lousy. That sounds obvious, but there’s a lot of complicated math behind it. Usually these trends will last longer than you or anyone thought possible.

    That means that the big events in the markets are the turning points. Spotting them, however, is notoriously difficult. Make that impossible. That’s where the 50-DMA comes in. It’s a dumb metric but it does give you a general sense of where you are vis-à-vis the current trend.

    The 50-DMA won’t pick the exact bottom, but it will turn not long after, and it will turn earlier if the turn is more dramatic. During last year’s market panic, the S&P 500 jumped above its 50-DMA about one month after the low. The stock market closed lower again today, but this time by just 0.08%.

    There’s a very general rule of thumb that after big days, the market will perform one-third of the opposite of what it just did. So a drop of 1.7% will be followed by a rise of 0.57%. Early on today, it looked like we were going to heed close to the rule, but the market sagged into the close.

    Another Lehman Brothers Moment?

    So what caused the market to stumble? The most prominent reason is that a Chinese real estate company called Evergrande is about to go kablooey. Some folks are talking about it being a “Lehman moment” akin to when Lehman Brothers went under 13 years and one week ago.

    Evergrande is a highly reckless company that gorged on debt. The company now owes $300 billion. There’s a famous quote from John Paul Getty: “If you own a bank $100, that’s your problem. If you owe the bank $100 million, that’s the bank’s problem.” I’d add that if you owe the bond market $300 billion, that’s the global financial system’s problem. The WSJ said that Evergrande was paying off suppliers with unused real estate properties.

    Evergrande was the kind of company that found itself in the right place at the right time. The company made affordable housing that met the demands of China’s growing middle class. From the WSJ: “It expanded into theme parks, healthcare services, mineral-water production and electric-vehicle manufacturing. It enlisted Hong Kong actor Jackie Chan at one point to help promote its bottled water.”

    For its part, Beijing seems completely uninterested in any sort of bailout. I hate to think that the Communists do capitalism better than we do. In fact, Evergrande’s recent problems have been quickened by the Chinese government’s push against speculation. The government didn’t like it when home prices soared out of the reach of so many workers.

    The problem with these kinds of problems is that you’re never exactly sure who’s exposed to the risk. Company A may go bust and it can be a terrible company. Company B may be a very good company but it loaned Company A way too much money. Now Company B is in trouble. Then if Company B starts to rattle, you don’t know who was exposed to them, and so on. In no time, you can have a chain reaction that freezes world finance.

    I’m sure you’ve heard of the Butterfly Effect. This is the idea that one small event on one side of the world have can have a major impact, weeks later, on the other side of the world. Global finance is like the Butterfly Effect just faster and with more money.

    In the 1990s, there was a very successful hedge fund called Long-Term Capital Management. It was full of a lot of eggheads who used their models to make tons of money. The problem is that models can only get you so far in finance. LTCM made a big bet on Russia. They assumed that Russia would never default on its debt. After all, that’s something that had never happened with a nuclear power. That is, until it did. Russia defaulted and LTCM got totally wiped out. It all happened in a few days.

    The problem for the Fed was that half of Wall Street had lent them money. At one point, the fund was worth $4.7 billion. After they went bust, Warren Buffett offered to buy LTCM for $250 million. He gave them one hour to decide. Ultimately, a group of Wall Street banks got together to bail them out (no government money was used).

    Investors outside of the United States have become used to news emanating from New York and Washington driving capital markets. Perhaps for the first time, American investors will have to stand and watch what’s happening in China. I don’t know if the Chinese economy is in trouble, but Wall Street economists have been cutting their forecasts for Chinese GDP growth. That means tourism in the U.S. I noticed that shares of Disney (DIS) were down over 4% today.

    It’s all connected, so said the butterfly.

    Stock Focus: Veeva Systems

    I like to say that the only thing better than owning a monopoly is owning a near-monopoly. After all, the real thing tends to draw too much attention.

    That leads to me this week’s stock which is Veeva Systems (VEEV) of Pleasanton, CA. While Veeva isn’t technically a monopoly, it enjoys many of the advantages that a monopoly has. Veeva is a cloud-computing company that’s focused on pharmaceutical and life sciences industry applications. The company was founded in 2007 by Peter Gassner and Matt Wallach. Gassner has become a billionaire along the way and he currently serves as CEO.

    What Veeva does is help drug companies capture clinical trial data and follow regulations while letting their sales forces to be more effective. The company has been very successful. Veeva recently became the fifth SaaS (software-as-a-service company) to join the billion-dollar revenue club. The key is that Veeva brings the benefits of cloud computing to a single industry.

    This is a critical time for Veeva due to Covid-19. Running all those clinical trials normally involves visiting doctors and researchers. Veeva allows that to happen virtually, which places Veeva’s services in great demand. A particular strength is that Veeva helps its clients comply with government regulations.

    I have to confess that watching Veeva has become somewhat entertaining because Wall Street consistently predicts that Veeva’s remarkable run is about to come to an end. Yet each quarterly earnings report easily dispels that notion.

    The last report was especially good. On September 1, Veeva said that total revenues for Q3 jumped 29% to $455 million. Not bad. A key stat is that subscription revenue increased by 29% to $366 million. That’s a very good number. All things being equal, I prefer to see a company with strong recurring revenue.

    Quarterly earnings came in at 94 cents per share. That beat Wall Street’s forecast by seven cents per share. Veeva has now beaten Wall Street’s consensus for at least the last 32 quarters in a row. (It could be even longer, but that’s as far back as my data goes.)

    In the earnings report, Veeva also offered guidance for Q3 and the rest of the fiscal year. For the current quarter, ending October 31, Veeva sees revenues ranging between $464 and $466 million. The company sees earnings of 87 to 88 cents per share. That’s a small range which I take to be a hint.

    For the full fiscal year which ends on January 31, Veeva projects revenues of $1.830 to $1.835 billion, and earnings of $3.57 per share. While that’s an optimistic forecast, it didn’t satisfy everyone.

    Like I said, Veeva has been ganged up on more than once by a nest of short-sellers. Their mantra has been, “Sure, Veeva’s had some impressive growth until now but the total addressable market isn’t that large.” I think that’s way off-base. In fact, I think cloud is only the beginning.

    Now let’s get to some truly remarkable stats. Veeva maintains gross margin in excess of 70%. That’s very impressive. Their operating margins are consistently over 25% and the company doesn’t carry any long-term debt. That’s a testament to how strong a position Veeva has in its market. Peter Gassner has referred to Veeva as having delivered what he calls “30/30” quarters, meaning 30% growth and 30% operating margins.

    The stock has been a phenomenal winner (see the chart above). Five years ago, you could have picked up one share of VEEV for $40. Lately, VEEV has traded near $300. That’s quite a run.

    While I like Veeva a lot, I’m not a fan of the share price. It’s run too far too fast. Even if we assume the company’s optimistic forecast is correct (and it probably is), that means Veeva is currently trading at 83 times this year’s earnings estimate. That’s about four times what many other stocks go for.

    I understand the need to pay for growth, but investors must keep things in perspective. Even if Veeva continues to cream estimates, the stock is still very pricey. Veeva Systems is definitely a stock to watch, but it’s not even close to being a Buy until it’s close to $150 per share. Even that is still pretty rich.

    – Eddy

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  • Morning News: September 21, 2021
    Posted by on September 21st, 2021 at 7:04 am

    Global Markets Swoon as Worries Mount Over Superpowers’ Plans

    Fortunes Tumble From Seattle to Shenzhen in $135 Billion Wipeout

    U.K. Warns of Challenging Few Days as Energy Crisis Deepens

    There’s a Fortune to Be Made in the Obscure Metals Behind Clean Power

    Lael Brainard Walks Tightrope Toward Next Job With Fed Chair in Play

    Wall Street’s Message on Evergrande: China Has It Under Control

    Royal Dutch Shell Sells Permian Basin Oil Holdings for $9.5 Billion

    Mnuchin’s Private Equity Fund Raises $2.5 Billion

    Bezos Puts $1 Billion of $10 Billion Climate Pledge Into Conservation

    Uber CEO Aims for ‘Fully Green’ Food-Delivery Business

    DoorDash to Offer Alcohol Delivery in 20 States and DC

    A Caribbean Island’s Audacious Tourism Experiment

    Holiday Bummer: Now Prices Are Soaring for Christmas Trees and Decorations

    The Economic Mistake the Left Is Finally Confronting

    The Taper, When It Comes, Will Feel Like a Relief

    Be sure to follow me on Twitter.

  • Ugly Day Comes to a Close
    Posted by on September 20th, 2021 at 4:36 pm

    Yuck, that was an ugly day!

    At its low, the S&P 500 was down 2.87%. At least we had a decent rally off the low. The S&P 500 gained 1.20% off today’s low. By the closing bell, the S&P 500 was down 1.70%.

    At one point, the Dow was off by 971 points.

    This kind of day is almost perfectly made for our Buy List to outperform. Five of our Buy List stocks closed higher and nineteen of our 25 stocks beat the S&P 500 today.

    It’s not that we were brilliant today. Rather it reflects the relative conservatism of our portfolio.

    It always sounds odd to talk about outperformance on a down day, but that’s important for our strategy.

  • Stocks Sees Biggest Drop Since May
    Posted by on September 20th, 2021 at 10:38 am

    The stock market is starting to feel some pain. As I write this, the S&P 500 has been down as much as 1.7% this morning. We haven’t seen a loss like that since May. Of course, there’s a lot of trading to do between now and the closing bell.

    The warning sign came on Friday when the S&P 500 closed just below its 50-day moving average (that’s the blue line on the chart below). Until now, the 50-DMA has been like a trampoline. Every time the market has gotten near it, the bulls have rushed in to save the day. Well, they’re nowhere to be seen this morning.

    The S&P 500 hasn’t closed below its 50-DMA on back-to-back days since last October. That’s the longest such streak in 25 years.

    What’s the reason for the selloff? There’s a lot of talk about Evergrande going belly up. That’s a Chinese development firm that has way too much debt. The fear is that we’re near a “Lehman moment” where one crack in the wall highlights many, many cracks. Of course, there are lots of folks who claim we’re near a Lehman moment every week.

  • Morning News: September 20, 2021
    Posted by on September 20th, 2021 at 7:09 am

    A ‘Perfect Storm’ is Brewing in India’s Investment Scene, Says VC Investor

    Evergrande Gave Workers a Choice: Loan Us Cash or Lose Your Bonus

    China Property Fear Spreads Beyond Evergrande, Roiling Markets

    The Global Housing Market Is Broken, and It’s Dividing Entire Countries

    Global Supply Shortages Reach All the Way to a Haitian Aid Group

    Biden’s Entire Presidential Agenda Rests on Expansive Spending Bill

    Why the Fed Might Welcome a Bond Market Tantrum

    With the Focus on a Taper, Five Questions for the Fed

    The Taper That Will Really Bite Into U.S. Growth Isn’t the Fed’s

    How Accounting Giants Craft Favorable Tax Rules From Inside Government

    How Car Rentals Explain the 2021 Economy

    Google’s Former AI Ethics Chief Has a Plan to Rethink Big Tech

    Gates Raises $1 Billion as Corporate CEOs Join Race to Scale Clean Tech

    Antitrust Is Happily Dying Before Our Eyes, and Judges Are the Reason

    The Pandemic Has Sparked a Book Craze — and Barnes & Noble is Cashing In

    Be sure to follow me on Twitter.

  • Thermo Fisher Jumps on Investor Day
    Posted by on September 17th, 2021 at 3:51 pm

    Thermo Fisher (TMO) had its Investor Day today and the shares are reacting well to what the company had to say. For 2021, TMO sees earnings of $22.07 per share on revenue of $35.9 billion. That’s up from $19.55 per share and $32.2 billion for last year. The 2021 guidance is the same as what they’ve said before.

    Thermo offered initial guidance for 2022 of $21.16 per share and revenue of $40.3 billion. In 2025, Thermo sees earnings of $31.04 to $31.84 per share on revenue of $4.88 to $5.08 billion.

    Shares of TMO have been up as much as 8.7% today.

  • Morning News: September 17, 2021
    Posted by on September 17th, 2021 at 7:00 am

    Europe’s Energy Crisis Is Driving Up Natural Gas Prices Worldwide

    Do We Need to Shrink the Economy to Stop Climate Change?

    China Applies to Join Pacific Trade Pact to Boost Economic Clout

    China Adds $14 Billion Cash as Evergrande’s Pain Roils Markets

    Inquiry Finds World Bank Officials, Including Now-I.M.F. Chief, Pushed Staff to Inflate China Data

    November? December? Fed’s ‘Taper’ Timeline Tied to Volatile Jobs Data

    If Your CEO Talks Like Kant, Think Twice Before Investing

    Wall Street Influencers Are Making $500,000, Topping Even Bankers

    Hedge Funders Are Chasing Crypto Despite Warnings of a Possible Crash

    Banks Beware, Amazon and Walmart are Cracking the Code for Finance

    Retailers Rethink Pandemic-Battered Manhattan

    ‘Shang-Chi’ Wins a Warm Asia Greeting. Then There’s China.

    Where Did It All Go So Wrong for Juul?

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  • Jobless Claims and Retail Sales
    Posted by on September 16th, 2021 at 11:17 am

    Two economic reports this morning. First, unemployment claims rose to 332,000. That’s up 20,000 from last week which itself was revised higher by 2,000. Last week’s figure of 312,000 is the current pandemic low.

    By the way, the unemployment figures are roughly in line with some of the numbers we saw seven years ago. In other words, we’re getting back to something that looks like normal.

    The other report was retail sales. For August, retail sales rose by 0.7%. In the last year, retail sales are up 15.1%. That number surprised Wall Street. Economists had been expecting a decline of 0.8%. The number for July was revised downward from -1.1% to -1.8%.

    Economists had expected that consumers cut back their activity as the delta variant continued its tear through the U.S. Persistent supply chain bottlenecks also were expected to hold back spending as in-demand goods were hard to find.

    The pandemic’s impact did show up in sales at bars and restaurants, which were flat for the month though still 31.9% ahead of where they were a year ago.

    However, sales were strong for most areas during the month, when back-to-school shopping generally results in a pickup in activity, especially so this year as schools prepared to welcome back students after a year of remote learning.

    The headline number would have been even better without a 3.6% monthly drop in auto-related activity; excluding the sector, sales rose 1.8%, also well above the 0.1% expected gain.

    Just a reminder that the Fed meets again next week.

  • Morning News: September 16, 2021
    Posted by on September 16th, 2021 at 7:04 am

    When the Dragon Sneezes, Europe Catches a Cold

    Japan Cuts Economic View on Weaker Production, Spending Due to COVID Revival

    These Charts Show Impact of China’s Casino Crackdown on Macau

    No Chinese Stock Left Among Global Top 10 as Tencent Slides

    China Intensifies Hunt for Cryptocurrency Miners in Hiding

    The Coinbase Spat With the SEC Ups the Ante in Washington’s Crypto Fight

    Democratic Tax Proposal Takes Aim at ETFs

    Boom for Banks as M&A and Pandemic Boost Corporate FX Needs

    Delta Tells the Economy, Not So Fast

    ‘Just Get Me a Box’: Inside the Brutal Realities of Supply Chain Hell

    U.S. Poverty Fell Last Year as Government Aid Made Up for Lost Jobs

    The Battle for Digital Privacy Is Reshaping the Internet

    What the Privacy Battle Upending the Internet Means for You

    Climate Change Calls for Backup Power, and One Company Cashes In

    Chevron CEO Warns of High Energy Prices and Supply Crunches

    Be sure to follow me on Twitter.

  • August Industrial Production Increased by 0.4%
    Posted by on September 15th, 2021 at 1:19 pm

    A quiet day so far. The stock market is up today after falling six times in seven days. I don’t think you’ll see many shallower losses for six-in-seven-day stretches. We also came somewhat close to the 50-day moving average. That can be an important psychological breaking point, but not always.

    Once again, energy stocks are doing the heavy lifting. Energy had been lagging since March. Only recently has it perked up again.

    The Federal Reserve released the industrial production report this morning. Last month, industrial production increased by 0.4%. The Fed said that Hurricane Ida chopped off 0.3% from that number. The increase for July was revised up to a gain of 0.8%.

    Industrial production is now 0.3% below its pre-pandemic peak. This was our sixth monthly increase in a row.