CWS Market Review – June 29, 2021
Posted by Eddy Elfenbein on June 29th, 2021 at 8:04 pm

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The S&P 500 closed a little bit higher today marking its 33rd new high of the year. That’s about one in every four trading days this year. Since its low 15 months ago, the stock market has nearly doubled. Charlie Bilello, one of my favorite market stats guys, notes that going back to the beginning of 2013, the index has now made 309 new all-time highs.

I used to call this the Honey Badger market for its ability not to care. Now I may call it the Rita Coolidge market. Nothing but all-time highs.

How much further can it run? Eh, that’s hard to say but there’s no obvious reason we’re due for a plunge. Tomorrow is the final trading day of Q2 and the first half of 2021. So far, it’s been a great year for stock investors. What’s interesting is that a strong first half of the year has often been a good omen for a strong second half of the year. You might think it would revert to the mean, but that’s not necessarily the case.

Ryan Detrick of LPL Financial points out that when the S&P 500 gains more than 12.5% in the first half of the year, the median gain for the second half is close to 10%. That’s nearly doubled the other years. In other words, strong gains often lead to more strong gains. Rallies build on themselves. Of course, that will eventually lead to a breaking point.

The Bull Market for Crap

While I doubt we’re at a breaking point just yet, there’s been a disturbing trend of a lot of terrible companies turning to the public market to raise tons of cash. I suppose that’s how markets are designed to work, but it’s a little unsettling that’s so many unsound companies can effortlessly rake in so much from investors.

Bloomberg notes that since March, almost 100 money-losing companies have raised money via secondary offerings. That’s twice the number of profitable companies.

According to Sundial Research, over the past 12 months, 750 unprofitable companies have turned to the secondary market. That’s the widest margin between money-making and money-losing firms in nearly 40 years.

There may be a few factors driving this phenomenon. For one, the higher-quality companies may already be flush with cash thanks to a strong market, a recovering economy and low interest rates. As the pandemic broke, many companies were quick to raise cash so they had enough protection to ride out the storm. Now that rates are still low, it’s probably not worth it to pay off those credit lines. That could be leading to a wave of buyouts.

Also, the booming market for lower-quality stocks adds extra incentive for these companies to raise money. That’s just natural supply and demand. I can’t blame low-quality companies for taking advantage of a good market for them. Several of the meme stocks already have raised money.

This isn’t just happening in the stock market. Junk bonds are now yielding just over 4%. That’s an all-time low. In fact, the spread between junk debt and investment-grade is the narrowest it’s been in over a decade. Crap is in, and the crappier the better.

Here’s a long term chart of junk bonds. Sorry, I mean “high yield” bonds.

Of course, it’s important that low-quality sectors have their day in the sun. That’s how marginal areas can thrive. However, our concern is when it overshoots any reasonable expectations. Some low-quality companies will improve even though the odds are against them.

This raises some interesting questions about investment analysis. So much of valuation analysis works on a disconnect between price and value. But what’s interesting is how price can impact value.

Let me explain what I mean. Is AMC a good company? Not at all. But that didn’t stop them from raising a ton of cash thanks to an inflated stock price. Heck, if folks are going to throw money your way, why not take it? All that new cash is a big help to AMC’s business. As a result, the business is truly more valuable. AMC’s finances are better. A change in price caused a real increase in value. In fact, thanks to the new cash, AMC got a credit-rating upgrade.

Investor George Soros wrote about this process in his book, The Alchemy of Finance. Soros calls the interplay between price and value the General Theory of Reflexivity. (I tried to read the book a few times and didn’t get far.)

I suspect that the run for low-quality may be nearing an end. At the Financial Times, Michael Mackenzie writes:

Other strategists are looking at the merits of shifting towards “quality” companies that are well managed with strong balance sheets and steadily increasing dividends. After the stirring rebound of lower quality companies that populate the value stock universe, these are looking more attractive on a relative basis.

BlackRock’s benchmark of high-quality companies is currently trading at its largest discount to the Russell 1000 index in more than two decades. That reflects how investors have sought recovery stories in companies that were hit hard by lockdowns in the leisure, travel and retail industries.

“We are still very value tilted, but we are starting to dial that back and look at the quality trade,” says Tony DeSpirito, chief investment officer of US fundamental active equity at BlackRock. While he expects that value and cyclical shares have not fully exhausted their run, the clock is ticking.

Once the economy shifts into a mid-cycle phase, history shows that quality shares start outperforming.

I wouldn’t be surprise to see a turn to quality sometime soon.

Facebook Becomes a Trillionaire

Yesterday, shares of Facebook (FB) rallied after a judge dismissed two anti-trust complaints. The stock gained more than 4% and FB’s market cap broke the $1 trillion barrier.

Facebook becomes the fifth member of the “four comma” club. The others are Apple, Amazon, Google and Microsoft. What’s most interesting about Facebook is that it made the journey in the fastest time. The company was founded, famously, in Mark Zuckerberg’s dorm room 17 years ago.

I’m reminded of the scene in The Social Network when Sean Parker says, “one million dollars isn’t cool. You know what’s cool? A billion dollars.” Now Facebook is at one thousand times that.

I found an interesting tidbit at Bloomberg. There are currently 58 Wall Street analysts who follow Facebook. Among those, 49 have it rated as a buy. I can’t imagine what the 49th buy opinion has to say that hasn’t been covered by any of the other 48. What’s the point of analysis if everyone agrees with each other? Just three analysts rate Facebook a sell.

Speaking of the ultra-wealth, Morgan Housel tweets that Steve Ballmer’s net wealth is about $100 billion. That’s especially impressive because he wasn’t a founder of Microsoft. He was employee #30. Also, Ballmer hasn’t sold as much stock as Bill Gates has. I’m pretty sure that Gates would be the richest person in the world if he had held onto all his shares.

But I find Ballmer’s enormous wealth fascinating because so much of it came after he left Microsoft. Here’s a chart of MSFT since Ballmer left:

Wow! Shares of MSFT didn’t perform terribly well when Ballmer was CEO. He came in for a lot of criticism and some prominent folks on Wall Street urged him to step down. It’s a tough job, so I’m not going to pile on.

Since Satya Nadella took over as CEO seven years ago, the stock has been a big winner. No one has benefitted as much as Steve Ballmer. That’s an impressive achievement to profit off of getting replaced. He’s now one of the wealthiest people who has ever lived. In any event, Ballmer’s Clippers are trailing the Suns 3-2.

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

– Eddy

Home Prices Are Soaring
Posted by Eddy Elfenbein on June 29th, 2021 at 10:06 am

The housing market is hot. Today’s Case-Shiller report shows that home prices rose at an annualized rate of 14.6% in the 12 months end in April. That’s fastest in 30 years of data. It’s an increase from 13.3% for the 12 months ending in March.

Phoenix, San Diego, and Seattle reported the highest year-over-year gains. All were up over 20% from the year before.

“April’s performance was truly extraordinary. The 14.6% gain in the National Composite is literally the highest reading in more than 30 years of S&P CoreLogic Case-Shiller data,” said Craig Lazzara, managing director and global head of index investment strategy at S&P DJI.

Not only did home prices rise in all 20 cities, but the price gains accelerated in all as well and were in the top quartile of performance historically.

Five cities – Charlotte, Cleveland, Dallas, Denver and Seattle – saw their largest annual gains ever.

FactSet Reports Earnings of $2.74 per Share
Posted by Eddy Elfenbein on June 29th, 2021 at 9:08 am

This morning, FactSet (FDS) reported fiscal Q3 earnings of $2.74 per share. That missed estimates by two cents per share and it’s down from $2.86 per share one year ago.

“I’m pleased with the acceleration in our top line and proud of our record of returning value to our shareholders every year since we became a public company 25 years ago,” said Phil Snow, CEO, FactSet. “Demand for our open content and analytics platform continues to fuel our growth as clients pursue their own digital transformations. We believe that the next generation of digital solutions we are building for the financial community will enable us to grow faster.”

I was I could share Mr. Snow pleasure. This was a decent quarter for FactSet but I was expecting more.

Revenues increased by 6.8% to $399.6 million. At the end of the quarter, FactSet’s Annual Subscription Value, or ASV, stood at $1.6 billion. That’s up $100 million in the past year. That’s an important indicator of future revenue. What concerns me is that FactSet’s operating margin slipped to 29.5%. That’s down 3% over the past year.

One bright spot is that the company increased its organic ASV plus professional services outlook to be in the range of $85 million to $95 million.

Some more details. At the end of the quarter. FactSet’s client count stood at 6,172. The company’s user count is up to 155,004. Annual ASV retention was greater than 95%. When expressed as a percentage of clients, annual retention improved to 91%, year over year.

During the quarter, FactSet bought 178,100 shares of its stock for $57.6 million. That’s an average price of $323.25. In the current program, there’s $292.4 million left to buy back stock.

FactSet didn’t change its full-year earnings forecast of $10.75 to $11.15 per share. I thought there was a good chance they’d increase the range.

So far this year, FactSet has made $8.32 per share. That implies FactSet expects Q4 earnings to range between $2.43 and $2.83 per share. Wall Street currently expects $2.80 per share.

Here’s an updated look at FactSet’s guidance:

Morning News: June 29, 2021
Posted by Eddy Elfenbein on June 29th, 2021 at 7:06 am

EU Watchdog Takes Deep Dive Into Banks’ Use of Tech

China’s Central Bank Strikes Positive Tone as Economy Stabilizes

Don’t Let the Hawkish Talk Fool You. Fed, ECB, BOJ Will Stay Relatively Loose

Wall Street Funnels Cash to Investors on Stress-Test Success

Commodity Traders Harvest Billions While Prices Rise for Everyone Else

Markets Work, But Untangling Global Supply Chains Takes Time

High Lumber Prices Add Urgency to a Decades-Old Trade Fight

Lower Rents? Check. Speakeasy? Check. How Office Landlords Are Enticing Tenants.

As Regulatory Scrutiny Intensifies, Crypto Exchange Binance Jumps on the NFT Bandwagon

Clean Energy ETFs Take a Hit, but Money Keeps Flowing In

United Goes All-In on Premium Flyers With 270 Jets, Upgrade

Facebook Stock Hits an All-Time High After Judge Dismisses FTC Complaint

Oil Drops as COVID-19 Surges Threaten Fuel Demand Outlook

Gas Stations Are Running Out of Gas Ahead of the Holiday Weekend

Juul Will Pay $40M to Settle Suit Over Marketing to Minors

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Is Buffett Looking at Hershey?
Posted by Eddy Elfenbein on June 28th, 2021 at 12:04 pm

The stock market is mostly flat today. On Friday, the S&P 500 closed at its 33rd all-time high this year. Charlie Bilello points out that since the start of 2013, the S&P 500 has made 327 all-time highs.

This looks to be one of the best first halves on record. In fact, a strong first half has often been followed by a strong second half. Ryan Detrick notes that when the market gains more than 12.5% during the first six months of the year, the median return of the following six months has been close to 10%. That’s nearly double the return of the other years.

Hershey (HSY) got to a new high today. The New York Post reported that the Hershey jet was spotted in Omaha.

A jet owned by candy maker Hershey made an unusual trip to Omaha, Nebraska, the home of Warren Buffett, according to an analyst with a history of spotting deals through plane records.

Don Bilson, head of event-driven research at Gordon Haskett, said in a note Thursday that a plane tracked as being owned by Hershey made a June 12 trip to Omaha.

Is there a Buffett deal in the works? One sticking point is that the Hershey Trust owns a majority of shares. Warren Buffett is about the only person who could win their votes.

There’s not much economic news today, but this is jobs week. Later in the week, we’ll get the jobs report plus several key turn-of-the-month economic reports.

Morning News: June 28, 2021
Posted by Eddy Elfenbein on June 28th, 2021 at 7:06 am

Binance, the World’s Largest Cryptocurrency Exchange, Gets Banned by UK Regulator

Bitcoin Leads Crypto Rally in Defiance of Regulatory Crackdown

Crypto’s Top V.C. Is Playing the Long Game

How Two Start-Ups Reaped Billions in Fees on Small Business Relief Loans

Blue Collars Have Outpaced White Collars in Pay—At First Glance

Where Jobless Benefits Were Cut, Jobs Are Still Hard to Fill

Fed’s Rosengren Says U.S. Can’t Afford Housing Market ‘Boom and Bust’

Illegal Gambling Mocks The Economics Profession’s Fed Obsession

China’s Envision to Build Renault $2.4 Billion Battery Plant

Google’s Cookie Delay Is Bittersweet for Trade Desk

United Airlines Closes in on $30 Billion Post-Pandemic Jet Order

NBA Star Risks Billions for Failing to Diversify Executive Ranks

Swiss Bank UBS to Allow Most Staff to Adopt Hybrid Working

Burberry Shares Tumble After CEO Resigns to Join Rival

The Cryonics Industry Would Like to Give You the Past Year, and Many More, Back

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Morning News: June 25, 2021
Posted by Eddy Elfenbein on June 25th, 2021 at 7:03 am

China’s PBOC Leads the Fed in Weaning Economy Off Stimulus

China Crushed Jack Ma, and His FinTech Rivals Are Next

China’s Ban Forces Some Bitcoin Miners to Flee Overseas, Others Sell Out

Bitcoin to Become Legal Tender in El Salvador on Sept 7

‘For The Bitcurious’—Tesla Billionaire Elon Musk Suddenly Sends The Dogecoin Price Sharply Higher After Trashing Bitcoin

Supreme Court Kills The Fannie And Freddie Preferred Trade

Job Hole or Inflation? Fed Policymakers Split Over Risk View

Wall Street Sees Big Wish Granted in Biden’s Infrastructure Deal

Why Washington Can’t Quit Listening to Larry Summers

Ousting Toshiba Chairman, Foreign Investors Score Breakthrough in Japan

Panasonic Sells Tesla Stake for $3.6 Billion

Amazon and Google Face UK Competition Probe Over Fake Reviews

Teamsters Pass Resolution to Unionize Amazon Drivers, Warehouse Workers

Nike Earnings Beat Expectations. Why Its Stock Is Jumping.

Phantom Goldman Banker Is Bait in Swiss Trader Kidnapping ‘Trap’

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Another All-Time High for Stocks
Posted by Eddy Elfenbein on June 24th, 2021 at 10:45 am

The stock market is again up to a new all-time high. The S&P 500 has been as high as 4,271.16 this morning. The Dow is still about 800 points from its all-time high from May 10.

This morning’s weekly unemployment claims report fell to 411,000. That’s still above the pandemic low of 374,000 from two weeks ago.

Also this morning, the Q1 GDP was revised to 6.4%. That’s the same number as the first and second reports. I don’t ever recall that happening. In fact, there’s a tiny change in these numbers but not enough to alter the decimal.

Morning News: June 24, 2021
Posted by Eddy Elfenbein on June 24th, 2021 at 7:03 am

China ‘Banks’ Time for Its Elderly While U.S. Seniors Drown in Debt

U.S. Bans Imports of Solar Panel Material from Chinese Company

The Little Hedge Fund Taking Down Big Oil

JPMorgan Sees New Headwind for Bitcoin

No End to Whiplash in Meme Stocks, Crypto and More

The Inside Story of the Sideways Ship That Broke Global Trade

Antitrust Overhaul Passes Its First Tests. Now, the Hard Parts.

Yellen Steers the Economy With Brooklyn on Her Mind

Fed’s Mixed Messages on Inflation Unsettle Investors

The Canny Business Model Behind Our Obsession With White Paint

Buffett Weighs In on Tax-Free Philanthropy

Visa to Buy Swedish Fintech Tink for $2.2 Billion

BuzzFeed Nears Deal to Go Public Via SPAC, Eyeing Digital-Media Rollup

Credit Suisse’s New Chairman Sends Chill Through Investment Bank

Bezos’ 2021 Space Odyssey A Risk Too Far for Insurers

Silicon Valley Gave Asia’s Richest Man Billions, But Things Aren’t All Going to Plan

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New-Homes Sales Miss Estimates. By a Lot.
Posted by Eddy Elfenbein on June 23rd, 2021 at 11:45 am

By my count, 13 Fed officials are giving speeches or testimonies this week. That’s a lot of jargon headed our way. The good news is that inflation fears continue to abate. The 10-year Treasury yield is below 1.5%.

This morning’s new-home sales report came in at 769,000. That’s the annualized number. That’s a big miss. Wall Street had been expecting 865,000. Of course, home prices have been shooting up so that should put some pressure on buying.

Not only that but the previous three months were revised downward. By a lot.

Shipping bottlenecks and higher input prices have held back homebuilding, contributing to skyrocketing prices for the limited supply of homes available. A silver lining of the report was data showing new-housing inventory continued to increase, though about a third of those homes have yet to be built.

(…)

There were 330,000 new homes for sale in May, the most since July 2019. At the current sales pace, it would take 5.1 months to exhaust the supply of new homes, compared with 4.6 months in the prior month.

The median sales price rose to a record $374,400. Mortgage applications have fallen sharply since January, suggesting that demand for homes is slowing.