Home Construction Rose 3.6% in May
Posted by Eddy Elfenbein on June 16th, 2021 at 10:48 am

Fed Day is here. The Federal Reserve’s policy statement is due out at 2 pm ET. The statement will include updated economic projections. Jerome Powell will also hold a press conference.

This morning’s housing report showed that home construction rose by 3.6% last month. That was below expectations.

It appears that the soaring cost of lumber is having an impact. Interestingly, lumber has been falling sharply for the last few days.

Applications for building permits dropped by 3% in May. That’s often an indicator of future construction.

Here’s an interesting fact: the IPO market for this year is already on pace to break last year’s record, even though this year isn’t quite half over.

The IPO gold rush is set to reach new heights in the second half of 2021, as a number of high-profile startups such as China’s largest ride-sharing company Didi Chuxing Technology Co Ltd, online brokerage Robinhood Markets Inc and electric-vehicle maker Rivian Automative LLC prepare to launch multi-billion dollar share sales.

“If the markets hang in anywhere near where they are right now, we are going to be incredibly busy this summer, and into the fall with IPOs,” said Eddie Molloy, co-head of equity capital markets for the Americas at Morgan Stanley.

Morning News: June 16, 2021
Posted by Eddy Elfenbein on June 16th, 2021 at 7:00 am

Cheer Over Boeing, Airbus Deal Belies Cracks in EU, U.S. Trade Relationship

Crypto Lode of $100 Billion Stirs U.S. Worry Over Hidden Danger

Record Run in Emerging-Market Currencies Is Now Stirring Worry

Is the Fed Planning an Escape Route?

How to Have a Roaring 2020s (Without Wild Inflation)

Biden Names Lina Khan, a Big-Tech Critic, as F.T.C. Chair

Retail Sales Fell in May, in Latest Sign of a Bumpy Recovery

Amazon Will Open the Doors to a Grab-and-Go, Checkout-Less Grocery Store on Thursday

Can A $110 Million Helmet Unlock the Secrets of the Mind?

Girl Scouts Stuck With Over 15 Million Boxes of Unsold Cookies

Ben Carlson: Predicting Inflation is Hard

Nick Maggiulli: Don’t Win the Game Too Early

Michael Batnick: The Sleeping Giants & Animal Spirits: Fed Apologist

Joshua Brown: IT LITERALLY GROWS ON TREES & Why JPMorgan’s Stockpiling Half a Trillion in Cash

Howard Lindzon: Momemtum Monday (Yes It Is Tuesday)…The Nasdaq 100 Back At All-Time Highs and Software Is Coming For The Bond Markets

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CWS Market Review – June 15, 2021
Posted by Eddy Elfenbein on June 15th, 2021 at 5:32 pm

(This is the free version of CWS Market Review. Don’t forget to sign up for the premium newsletter for $20 per month or $200 for the whole year. The premium version contains more detailed analysis and I cover our Buy List stocks in greater depth. Join us today!)

The stock market closed at another all-time high yesterday. That was its third record close in a row, although the S&P 500 closed a bit lower today. The stock market has now gone 17 days in a row trading in less than a 1% daily range.

For now, Wall Street is focused on this week’s Fed meeting. The policy statement will come out tomorrow afternoon. The central bank is nearing an important juncture. The Fed went to extraordinary lengths during the pandemic to help the U.S. economy.

Now that the economy is getting better, the Fed needs to unwind these efforts. We know that’s coming, but we don’t know when and how just yet. The Fed already said it’s going to pare back its holding of corporate bonds.

To be fair, that’s a minor item for the Fed. The big issue is the Fed’s massive buying of Treasury and mortgage bonds. Sometime soon, in all likelihood, the Fed will announce that it will gradually taper its bond purchases. However, the Fed doesn’t want a repeat of the infamous Taper Tantrum of 2013. That’s when the bond market went into a hissy fit at the mere mention of less support from the Fed.

In a Congressional hearing in May 2013, Ben Bernanke said that if the economy continued to improve, then Fed would gradually pull back on its quantitative easing. The bond market freaked out and yields soared. Bernanke quickly walked back his comments. (The bond market isn’t happy unless it’s upset.)

In late August, the Kansas City Fed will host its annual shindig in Jackson Hole, WY. My guess is that that’s when the Fed will address the issue of any sort of tapering. The Fed has been buying $120 billion in bonds every month, so I expect that any tapering will leave a big footprint.

Fortunately, I don’t expect any tapering to have a big impact on our Buy List stocks. For one, the tapering is widely expected. Also, our stocks are in much better shape than other companies so they did not need the support like others did.

Highest Producer Inflation on Record

The market and inflation news appear to be moving in opposite directions. The news, which is lagging, continues to show evidence of higher inflation. The bond market, which looks ahead, appears to be chilling out in its view of inflation.

Remember all those stories about the soaring price of lumber. Well, lumber is down 40% since May. Corn is also down as is copper. We’ll also seeing a break in home prices.

But it’s a mixed market. Today, for example, oil prices got to their highest level since 2018. This story ain’t so complicated. That’s the natural outcome of greater demand and lower supplies. But that’s not the only inflation warning we got today.

This morning, the Labor Department said that producer prices (PPI) rose 0.8% in May. That’s a big increase and it easily beat Wall Street’s forecast of 0.5%. Typically, inflation shows up at the producer level first before it works its way down to consumers.

Over the last year, producer prices are up by 6.6%. That’s the largest year-over-year increase since they started collecting the data in 2010. It’s not just food and energy. The “core” PPI is up by 5.3% over the past year. That’s the highest since they started tracking that data in 2014. Still, the bond market has been pretty chill. The 10-year yield is currently around 1.5%. Just a few weeks ago, it was close to 1.7%.

We also had the retail sales report come out this morning. For May, retail sales fell by 1.3%, but the details are more complicated. What’s really happened is that consumers have been shifting their spending to services which aren’t included in retail sales.

This made for an unusual retail sales report. For example, online sales fell as more folks wanted to go shopping in person. That’s certainly understandable. Spending at restaurants and bars rose 1.8% last month. Spending at casinos rose nearly 17% and theme parks were up 9%. Gyms saw an increase of 4%. These numbers compare May to April, but if we compare last month’s numbers with May 2020, then retail sales were up 28%. Clearly, people want to go out after being cooped up for so long. That ties into the demand for more labor.

Also this morning, the Federal Reserve said that industrial production rose by 0.8% in May. That’s a good number. Production of autos rose by 6.7%. I often hear people say that America “doesn’t make anything anymore.” That’s not true. America is a manufacturing superpower. The difference is that a lot fewer people do it.

The plunge and recovery in industrial production is something to behold:

List of Meme Stocks

A number of readers have asked about “meme” stocks. Obviously, I’m not a big fan of that type of investing, which is really gambling. I’ll give you a good example. Shares of Koss are up roughly 20 times their 52-week low. The shares are also off about 80% from their 52-week high.

There isn’t a precise definition of what makes up a meme stock, but here’s a list of 12 names that are often included in the meme universe.

AMC Entertainment (AMC)
Bed Bath & Beyond (BBBY)
BlackBerry (BB)
Clean Energy Fuels (CLNE)
Express (EXPR)
GameStop (GME)
Koss (KOSS)
Rocket Companies (RKT)
Sundial Growers (SNDL)
Tilray (TLRY)
Wendy’s (WEN)
Workhorse Group (WKHS)

Stock Focus: Waters Corporation

Now, for a much better stock. A company that’s been a finalist for our Buy List a few times but never a member is Waters Corporation (WAT). I like this company a lot. Even though it’s not well-known to investors, Waters is one of the world’s leading specialty measurement companies. Waters is focused on improving human health and well-being through the application of high-value analytical technologies.

The company was founded in 1958 by James Waters. He passed away a few weeks ago at the age of 95. Waters got his big break in 1972 when he solved a complicated problem for Robert Woodward, a Nobel Prize-winning chemist at Harvard. Waters went to Woodward’s lab with a liquid chromatograph and helped solve the problem within a few weeks.

Waters is headquartered in Milford, Massachusetts. After 73 years, it’s become a pretty big outfit. The company currently has over 40,000 customers and a workforce of 7,400 employees. Waters went public in 1995 and the shares are up 90-fold since then. This year, Waters is on track to register $2.7 billion in revenue. The current market cap is $21 billion. Waters is also a member of the S&P 500.

So what do they do? The company makes, sells and services high-performance liquid chromatographs, ultra-performance liquid chromatographs and mass spectrometers. Waters operates through two segments, Waters and TA (for thermal analyzers).

If you’re like me, then you probably rarely find yourself in the market for a spectrometer. Or maybe never. But there are lots of businesses who love them and buy them. But what do these things do? Spectrometers help identify chemical compounds. This is important for drug development, food testing, and air and water quality testing. Waters also designs and sells thermal analysis, rheometry and calorimetry instruments through its TA product line.

This is normally a very good business to be in. Waters has a high “moat” which means it’s well-protected from competitors. That’s the kind of company I like to buy. Waters often delivers operating profit margins near 30%. That’s quite good.

Unfortunately, Waters had a difficult year last year and also in 2019. I’ll give you an example. For Q1 2020, Waters reported earnings of $1.15. That was 32 cents below estimates. Wall Street was not pleased. During the pandemic bear market, the stock lost nearly 40% in a few weeks. Lately, however, business has greatly improved. Last month, Waters reported Q2 earnings of $2.29 per share. That beat estimates by 72 cents per share. Earlier today, the shares hit a new all-time high. From its 2020 low, Waters has gained more than 135%.

Check out its long-term performance:

Focusing in on the Q1 earnings report, I was glad to see that recurring revenue increased by 20%. Instrument systems sales were up by 49% and the pharmaceuticals market was up 32%. The sales results from Asia were also very good.

Waters’s President and CEO Dr. Udit Batra said, “There is much to be pleased about with our first quarter results, driven by strong growth across each of our major end markets, with pharma leading the way. Thanks to solid execution and instrument sales growing in double-digits, we saw revenue increases across every region, with China’s sales more than doubling. Our transformation plan is well underway, with commercial momentum and a strong leadership team in place, we now turn towards developing a new strategy as we work to more closely align our portfolio with higher growth areas of the market.”

What to expect for the rest of this year? Waters expects to see full-year sales growth of 8% to 11%. For earnings, Waters sees earnings ranging between $9.85 and $10.05 per share. That’s optimistic, but certainly doable.

For Q3, Waters expects sales growth of 14% to 16%. For earnings, Waters forecasts a range of $2.15 to $2.25 per share. Wall Street had been expecting $2.11 per share.

As much as I like this company, the stock is way too high. The shares are going for roughly 34 times this year’s earnings. However, if we were to see a 20% or so pullback, then I’d be very interested in Waters Corporation.

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

– Eddy

P.S. Don’t forget to sign up for our premium newsletter.

Retail Sales and Producer Prices
Posted by Eddy Elfenbein on June 15th, 2021 at 10:56 am

The stock market closed at yet another all-time high yesterday. It’s mostly flat so far today. There hasn’t been much volatility of late.

This morning’s retail sales report said that retail sales dropped 1.3% last month. What’s happening is that as areas of the economy are reopening, consumers are shifting their buying to services. That’s not included in the retail sales report.

This was an unusual retail sales report. For example, online sales actually fell as more folks want to go shopping in person. That’s certainly understandable. Spending at restaurants and bars rose 1.8% last month.

If we compared last month’s numbers with May 2020, then retail sales are up 28%. From the Wall Street Journal:

In the four weeks ending June 2, spending at casinos rose nearly 17% from the four weeks prior, while consumers spent 9% more at theme parks and indoor-entertainment centers including bowling alleys, according to Earnest Research. Spending at gyms was up almost 4% over the same period.

This morning, the Labor Department said that producer prices rose by 0.8% in May. That’s a very big increase. Typically, inflation will show up at the producer level first before it works its way down to consumers. Over the last year, producer prices are up by 6.6%. That’s the largest year-over-year increase since they started collecting the data in 2010.

Even if you exclude food and energy, then the PPI was up 5.3% over the last year. That’s the highest increase in seven years.

The Federal Reserve said that industrial production rose by 0.8% in May.

Morning News: June 15, 2021
Posted by Eddy Elfenbein on June 15th, 2021 at 7:04 am

Britain and Australia Announce Free Trade Deal, Johnson Hails ‘New Dawn’

World’s Bubbliest Housing Markets Flash 2008 Style Warnings

Billionaire’s Hedge Fund Offers Hefty Pay to Combat Talent Squeeze

Deutsche Bank Set to Reap $1 Billion on Trader’s Freight Bet

Facebook, Big Tech Face EU Blow in National Data Watchdogs Ruling

EU Says It Has Resolved 17-Year Aircraft Battle with U.S.

Two Republican U.S. Senators Introduce Antitrust Bill

Get Ready for a Flood of Sugar as Brazilians Buy Electric Cars

Jamie Dimon Says JPMorgan Is Sitting On About $500 Billion in Cash, Waiting to Invest In Higher Rates

A Major Revamp at PwC Is All About Trust

Lordstown, Truck Maker That Can’t Afford to Make Trucks, Is on the Brink

The Amazon That Customers Don’t See

Ben Carlson: Ford vs. Tesla

Michael Batnick: Did Barron’s Top Tick Teen Traders?

Joshua Brown: The Wage Inflation Is Going to Stick

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This Week’s Fed Meeting
Posted by Eddy Elfenbein on June 14th, 2021 at 2:28 pm

The Federal Reserve meets again this week, and cutting back its massive bond buying will probably be on the table.

The Fed wants to avoid a replay of 2013’s taper tantrum when bond yields started to rise on news that the Fed was paring back its bond purchases.

I doubt we’ll get any news this week. We’ll probably hear more on this topic at the Fed’s Jackson Hole meeting in late August.

As far as interest rate hikes go, that may not happen in all of 2021 and 2022.

Meme Stocks
Posted by Eddy Elfenbein on June 14th, 2021 at 2:22 pm

There’s no official definition of what makes a meme stock, but here’s a list of some of the well-known ones:

Morning News: June 14, 2021
Posted by Eddy Elfenbein on June 14th, 2021 at 7:10 am

What’s At Stake for Markets as Debt Ceiling Looms

The Recession Isn’t Over Till They Say It’s Over. (But Who Are They?)

Powell Dashboard Shows Uneven Recovery as Fed Plots Next Steps

Fed Tiptoes Towards the Taper Stage Months Before the Curtain Call

The Fed Can Neither Leave Out The ‘Punch Bowl,’ Nor Take It Away

Private Inequity: How a Powerful Industry Conquered the Tax System

‘Like Taxing Horseshoes’: Landlines Wane, Sap U.S. Broadband Aid

In Leak Investigation, Tech Giants Are Caught Between Courts and Customers

A Meme Stock Is Born: How to Spot the Next Reddit Favorite

How Trump’s Trade War Built Shein, China’s First Global Fashion Giant

Four at Toshiba Resign Over Campaign to Thwart Foreign Shareholders

American Duo Plead Guilty to Helping Former Nissan Chief Ghosn Flee Japan

Winning Bidder Paid $28 Million for Ticket to Space With Jeff Bezos

Joshua Brown: Bitcoin Thirstmonsters

Ben Carlson: Why I’m Not Worried U.S. Household Debt Is At Record Highs & The Coming Boom in Travel Credit Card Rewards

Michael Batnick: Animal Spirits: The State of Residential Real Estate & Animal Spirits: The State of Residential Real Estate

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Morning News: June 11, 2021
Posted by Eddy Elfenbein on June 11th, 2021 at 7:04 am

China May Not Be A Member of the G7, But It’s Dominating the Agenda

The Global Logistics Logjam Shifts From Suez to Shenzhen

As EU Preps Debut Recovery Bond, A Reality Check for “Safe Asset”

El Salvador Plans To Use Electricity Generated From Volcanoes To Mine Bitcoin

Saudi Arabia Takes Bullish Oil Message Straight to Wall Street

Prices Jumped 5% in May From Year Earlier, Stoking Debate in Washington

Sorry Millennials, Boomers Are Most Important Group for Market

Push to End Pandemic Benefits May Not Be Panacea for U.S. Labor Shortage

Netflix: The Store!

Starbucks, Flush With Customers, Is Running Low on Ingredients

Credit Suisse’s 30-Year-Old Trading Prodigy Goes It Alone

How Microsoft Is Ditching the Video Game Console Wars

Ben Carlson: How To Hedge Against Inflation

Joshua Brown: I Did the Business Casual Podcast This Week

Howard Lindzon: Jim Lanzone, CEO of Tinder, Joins Me on Panic with Friends to Discuss the Internet’s Battle for Attention

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Jobless Claims and CPI
Posted by Eddy Elfenbein on June 10th, 2021 at 9:52 am

Some more economic reports this morning. Initial claims fell to 376,000. That’s another pandemic low. The estimate was for 370,000.

This morning’s CPI report showed that consumer prices rose by 0.644% last month. Core inflation rose by 0.737%.

In the last year, headline inflation is up 4.927%. That’s the highest year-over-year rate since 2008. Core inflation is up 3.795%. That’s the highest year-over-year rate since 1992.

Used cars and truck prices continued their climb higher, rising 7.3% on the month and 29.7% for the past 12 months. The new vehicles index increased 1.6%, its biggest-single month gain since October 2009 and was up 3.3% for the 12-month period, the highest move since November 2011.

However, the energy index was about flat for the month despite the huge runup in gasoline prices this year, while the food index repeated its April rise of 0.4%.
The gasoline index is up 56.2% over the past year, part of an overall 28.5% increase in energy during the period. Food prices have remained comparatively tame, up 2.2% for the 12-month period.