Morning News: September 23, 2020
Posted by Eddy Elfenbein on September 23rd, 2020 at 7:07 am

China Threatens to Kill TikTok Deal Over ‘Dirty’ Trump Tactics

Embattled Fed Nominee Celebrates Free Markets, but Not in Her Backyard

Justice Dept. Case Against Google Is Said to Focus on Search Dominance

Amazon Restricts How Rival Device Makers Buy Ads on Its Site

Liberty or Lockdown

Tesla’s Value Drops $50 Billion As Musk’s Promised Cheaper Battery Three Years Away

Jack Ma’s Ant Plans $17.5 Billion Hong Kong IPO, No Cornerstone Investors

Nike Profit, Revenue Boosted By China Demand And Online Sales

KKR to Buy Online Contact Lens Retailer 1-800 Contacts

Store Operators Outraged At Subway’s COVID-19 Demands

Can Luxury Fashion Ever Regain Its Luster? & Is the New Guards Group the New Guard of Fashion?

Halloween Costume Masks Don’t Replace Face Masks, CDC Warns

Nick Maggiulli: How Much Lifestyle Creep is Okay?

Ben Carlson: Is the Ford F-150 Partially Responsible For the Retirement Crisis?

Michael Batnick: The Stock Market Makes No Sense. And it Makes Perfect Sense.

Joshua Brown: Household Net Worth Explodes: What Are Your Thoughts?

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Q3 Earnings Preview
Posted by Eddy Elfenbein on September 22nd, 2020 at 3:31 pm

September comes to a close next week and with it, the third quarter of 2020. By the middle of October, firms will start releasing their Q3 earnings reports.

Here’s the S&P 500 in black with trailing operating earnings in blue. Trailing earnings are expected to trough in Q4. The two lines are scaled at a ratio of 18 to 1.

This will be another tough earnings season due to the widespread dislocations caused by Covid-19. The good news is that we’ve gradually improved from the dire numbers we saw earlier this year. For Q1, operating earnings plunged 49% from Q1 of 2019. For Q2, earnings were down 33%.

Now analysts are “only” expecting a decline of 19%. That estimate has actually increased somewhat in recent weeks. At the middle of the year, Wall Street had been expecting Q3 earnings of $30.89 per share for the S&P 500 (that’s the index-adjusted number). Now the estimate is up to $32.05 per share. (Every point in the S&P 500 is worth around $8.27 billion.)

Earnings are expected to fall another 9% for Q4. After that, earnings are expecting to snap back briskly in 2021. That’s why price/earnings ratios, based on trailing earnings, are to be so stretched. Earnings are looking backward but prices are looking forward.

For all of this year, earnings are expected to be $113.84 per share. By today’s price, that gives the S&P 500 a lofty p/e ratio of 29. However, Wall Street expects full-year 2021 earnings of $164.04 per share. That assumes earnings growth of 45% for next year. Going by that figure, that gives the S&P 500 a forward p/e ratio of 20.

Here’s the expected earnings growth for Q3:

Health Care 23.81%
Technology 9.77%
Utilities -1.19%
Consumer Staples -1.68%
Communication -9.95%
Materials -12.56%
Financials -34.55%
Consumer Discretionary -37.20%
Real Estate -50.29%
Industrials -60.10%
Energy -108.27%

Existing-Home Sales Hit 14-Year High
Posted by Eddy Elfenbein on September 22nd, 2020 at 11:06 am

The stock market is up modestly this morning. Fed Chairman Jerome Powell is testifying this morning about the economic relief package.

This morning, we learned that existing-home sales rose for August rose to an annualized rate of six million. That’s the highest in 14 years. In the last year, sales are up 14.5% and housing inventory is down 18.6%.

This comes after July when existing-home sales were up 24.7%. In August, the median sales price rose to $310,600. That’s up 11.4% in the last year. In the last year, sales of homes worth over $1 million are up 44%.

From the WSJ: “’The luxury housing sector is just simply taking off,’ said Lawrence Yun, chief economist of NAR.” The average mortgage rate is now down to 2.87%.

The Bank of Jamaica
Posted by Eddy Elfenbein on September 22nd, 2020 at 9:36 am

The Bank of Jamaica wins the award for best communication with the public:

Morning News: September 22, 2020
Posted by Eddy Elfenbein on September 22nd, 2020 at 7:04 am

EU Top Court Backs Crackdown On Short-Term Home Rentals In Setback To Airbnb

Justice Dept. to Brief States on Google Antitrust Inquiry

Stakeholder Capitalism Gets a Report Card. It’s Not Good. & Capitalism Isn’t Working Anymore. Here’s How The Pandemic Could Change It Forever

Ruth Bader Ginsburg’s Indelible Mark On American Business

The Magic Number That Unlocks The Electric-Car Revolution

TikTok’s Zero Hour: Haggling With Trump, Doubts in China and a Deal in Limbo

The Math Doesn’t Add Up on TikTok’s Deal With Oracle and Walmart

The Disappointing Ban Of WeChat Calls For American Conservatives To Look Inward

Houston-to-Dallas Bullet Train Given Green Light From Feds, Company Says

Hedge Fund Bridgewater Set Up Tent Offices In The Woods To Beat COVID-19

Judge Fast-Tracks Tiffany Suit Against LVMH Over Abandoned $16B Deal

Ben Carlson: How Benchmarking Impacts Your Decisions

Michael Batnick: The Easiest Thing In Investing

Joshua Brown: How Big A Drawdown Can You Survive? & “more than half the racial gap in individual stock ownership has disappeared essentially overnight.”

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Fourth Down Day in a Row
Posted by Eddy Elfenbein on September 21st, 2020 at 4:19 pm

A rough day for the markets is on the books. The S&P 500 lost ground for the fourth day in a row. At its low, the index was off by 2.72%. Fortunately, we made a good deal of that back by the close. For the day, the S&P 500 lost “just” 1.16%.

The S&P 500 isn’t far from being down 10% from its high from earlier this month. That’s the official definition of a correction.

Even though the market was down, value stocks were down more than growth. Generally, value stocks don’t fall as much as growth, nor do they rally as strongly. Today was an exception. For the day, the S&P 500 Growth lost -0.73% while Value lost -2.43%. Bank stocks were the culprit. The entire financial sector got hit hard.

The big divide today was between cyclical and defensive stocks. Cyclical stocks were down the most. By this, I mean sectors like industrials, energy, financials and materials. From today’s action, I assume the market has raised its outlook for longer lockdowns.

Friday’s Selling Continues Into Today
Posted by Eddy Elfenbein on September 21st, 2020 at 10:27 am

On Friday, the S&P 500 finally closed below its 50-day moving average. This halted an impressive streak which started in April.

The 50-DMA may have been a key indicator for the bears because the selling has continued to today. The S&P 500 has been down as much as 2% today.

I have a simple way of looking at the “lockdown trade.” Just look at Zoom and Disney. I originally meant this as a joke (“The Elfenbein Lockdown Index”), but it does have value. The two stocks tend to move oppositely. Why? Because Zoom prospers if the economy is locked down while Disney prospers on a re-opening. It’s that simple. Today, Zoom is up by 5% while Disney is down by 3%. So lockdown worries are back.

Financial stocks are doing particularly poorly today. That’s also causing value stocks to do worse than growth stocks. Most every sector is down but the cyclicals are down the most while the defensive stocks are down the least. A few stocks like Walmart and Costco are in the green today.

Shares of Nikola are getting absolutely trashed this morning. The company went public in June. A few days ago, a research company, Hindenburg Research, released a scathing report which claimed the company misled investors about its technology.

The report is titled, “Nikola: How to Parlay An Ocean of Lies Into a Partnership With the Largest Auto OEM in America.” Not much for subtlety. The company responded, but the research firm was unimpressed.

Early this morning, literally at 2:21 am, the founder of Nikola announced his resignation via Twitter. Shortly after its IPO, Nikola got to $94 per share. This morning, it’s been as low at $24 per share.

This is also a good example of how markets should work. Short-sellers are often attacked by companies, but short sellers can also root out misstatements by management. They help keep the system honest.

Morning News: September 21, 2020
Posted by Eddy Elfenbein on September 21st, 2020 at 7:05 am

The Age of Electric Cars Is Dawning Ahead of Schedule

Banks Moved $2 Trillion Amid Laundering Orders, ICIJ Says & HSBC, StanChart Shares Fall To 22-Year Lows On Reports Of Illicit Money Flows

China’s ByteDance Says TikTok Will Be Its Subsidiary Under Deal With Trump, Trump Wants to Cripple TikTok and WeChat. Why? & ‘There’s No There There’: What the TikTok Deal Achieved

Jeff Zucker Helped Create Donald Trump. That Show May Be Ending.

Thanks to Google, App Store Monopoly Concerns Have Now Reached India

The 2020 Housing Boom Is A Perilous Economic Signal

Retailers Anxious About Socially-Distant Black Friday Rush

Amazon’s Buying Spree for Used Airplanes Makes Green Pledge Harder to Keep

Nikola Founder Resigns as Chair Amid Allegations, SEC Probe

Music Festivals Create Their Own ‘Bubbles’ to Get Partiers Back Out

Joshua Brown: What If He Doesn’t Leave? & My Favorite New Investing App On Earth

Ben Carlson: Negativity Is Not an Investment Strategy & Everything You Need to Know About Retirement

Michael Batnick: Animal Spirits: The Work From Home Backlash & Ideas For Retirement

Jeff Miller: Weighing the Week Ahead: Investors Need Some Accurate Evidence!

Howard Lindzon: Young Investors Reading List …and Young Investor Ali Hamed of CoVenture Joins Me On Panic With Friends

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CWS Market Review – September 18, 2020
Posted by Eddy Elfenbein on September 18th, 2020 at 7:08 am

The COVID-19 pandemic is causing tremendous human and economic hardship across the United States and around the world. – This week’s FOMC policy statement

Superficially, this is a quiet time for Wall Street. Daily volatility has been modest, and there’s not much big news. However, just beneath the surface, there’s a lot going on.

The trend that’s most prominent, in my opinion, is the shift from growth stocks to value stocks. I talked about this at length in last week’s issue. The trend continued this week after a modest pushback from growth. This could be the start of a long run for value.

We also had a Federal Reserve meeting this week. As expected, the Fed decided to forgo any change in interest rates. Additionally, it reiterated its commitment to keep interest rates low for a long time. Until now, the Fed has strongly suggested it would follow this policy. Now there’s no doubt as to the board’s intent. I’ll explain what it means for us and our portfolios.

We also got a stock split this week from Trex. The deck maker has been on a tear for us this year. Through Thursday, we have a 52% profit in Trex. Now we have twice as many shares! Later on, I’ll preview next week’s earnings report from FactSet. This is another big winner for us. The financial-data stock is up 24% this year. I’m expecting more great results from FactSet. I also have some updates on our Buy List stocks. First, though, let’s look at what the Fed heads had to say this week.

The Fed Is Committed to 0%

The Federal Reserve met again this week. As expected, the central bank didn’t make any change to its target for the Fed funds rate, which is still 0% to 0.25%. Basically, rates are flat on the floor.

The Fed also mentioned its willingness to let inflation drift above 2%. This was the big policy change that it had announced at its recent Jackson Hole conference. Until then, the Fed had held a target of 2% for inflation. Of course, inflation has been running below that almost consistently.

So the Fed is now not so worried about fighting the last war—the war on inflation. To be sure, it said that it’s willing to maintain 2% as a long-run goal for inflation. This means, in theory, that the Fed is willing to allow inflation of more than 2%, which can be offset by periods of sub-2% inflation, and it will all magically add up to 2%.

Yeah, right.

Look, the Fed’s intentions are perfectly fine, but they’ve consistently misjudged the economy. In trying to fight inflation, they’re fighting an enemy that’s simply not there, and they’ve actually harmed the economy while doing so. I think it’s for the best that they leave interest rates alone for some time.

What does inflation mean for us? It’s terrible. From our perspective, high inflation is bad news for stocks. But by high inflation, I mean over 5%. We’ve haven’t seen numbers like that in years.

I should add that the recent inflation reports have run a little hot. But that’s to be expected after three months of deflation, meaning falling prices, since the lockdowns started.

The Fed isn’t adopting this policy based on the sound judgment and the wisdom of its policymakers. No, it’s because everything else they’ve tried has failed. They’re doing this because they have to.

In its policy statement, the FOMC said, “The Committee expects to maintain an accommodative stance of monetary policy until these outcomes are achieved.” In English, this means “we won’t be raising rates for a looooong time.”

I’m not exaggerating. Here’s proof. The Fed also released its latest economic projections. These projections are notoriously off the mark, but it’s interesting to see what the Fed is thinking.

The FOMC has 17 members. (It has 19 normally, but there are two vacancies.) All 17 members are against raising rates this year. All 17 members are against raising rates next year as well. Sixteen of the 17 are against raising rates the year after that, and thirteen of the 17 are against raising rates the year after that.

Add it all up, and this means that the Fed is tacitly committed to keeping rates near 0% through 2023. The Fed also projects that inflation will neatly reach 2% in 2023. Call me a doubter.

More importantly, what does this mean for us? It’s good for stocks. Low rates are usually a strong catalyst for higher equity valuations. In particular, it’s good for high-yielding stocks. AFLAC (AFL), for example, currently yields 3%. You can’t get that at the bank. Also, AFLAC has increased its dividend for 37 consecutive years. On our Buy List, Hershey (HSY) and Hormel Foods (HRL) are also good dividend stocks.

Low rates for longer will also be good news for the housing sector. Mortgage rates are very low. This week, we learned that homebuilder confidence just touched an all-time high. This is good news for a company like Trex (which I’ll be discussing next).

I also want to mention that I’m seeing some signs of weakness in this market. No reason to panic, but the market likes to give us a nice shake every so often. For example, the S&P 500 has run above its 50-day moving average every day for nearly five months. This is a quick measure of the stock market’s momentum. Twice in the last five days, the S&P 500 has dipped below its 50-DMA during the trading day, but it hasn’t closed the day below it.

The economy may also be weaker than a lot of folks realize. This week’s industrial-production report was below expectations. So was the housing-starts report. Core retail sales fell slightly last month.

While the economy has certainly improved, the recovery has been choppy and uneven. There are lots of sectors of the economy that are still in rough shape. Furthermore, there’s the uncertainty of the U.S. election which is only a few weeks away. Now let’s look at our #1 stock this year.

Trex Splits 2-for-1

On Tuesday, shares of Trex (TREX) split 2-for-1. This means shareholders got twice as many shares while the share price fell in half.

A stock split doesn’t add any value in and of itself. Shareholders seem to prefer a stock with a lower nominal price, and boards of directors are willing to comply. Stock splits were much more popular in the 1990s.

I remember when the airline JetBlue split 3-for-2 three times in three years, even though the stock didn’t do much of anything. These splits don’t happen nearly as much as they used to.

Trex’s Buy Below price splits along with the stock. The Buy Below is now $75 per share.

For track-record purposes, I assume the Buy List is a $1 million portfolio that’s equally weighted at the beginning of each year. For this year, that meant we ”bought” 445.03783 shares of Trex with a starting value of $89.98 per share. That now becomes 890.07566 shares at $44.94 per share.

Trex has had an outstanding year for us. Last month, Trex reported Q2 earnings of 81 cents per share. That beat the Street by 16 cents per share. Quarterly sales rose 7% to $221 million. Not bad, considering we’re in an economic lockdown. The company also had nice increases to its gross and EBITDA margins. For Q3, Trex expects a 13% sales increase over last year’s Q3.

FactSet’s Earnings Preview

FactSet (FDS) is scheduled to report its fiscal Q4 earnings on Thursday, September 24. The financial-data company has been a very good stock for us this year, and the report for fiscal Q3 was quite good.

Let’s look at some details from Q3, which ended on May 31. Adjusted diluted earnings rose by 9.2% to $2.86 per share. That beat estimates by 43 cents per share. Quarterly revenues rose 2.6% to $374.1 million, while organic revenues climbed 2.6% to $375.3 million. I was particularly impressed to see FactSet’s operating margin rise by 1.5% to 35.5%.

For guidance, FactSet said it expects full-year revenues to range between $1.485 billion and $1.49 billion. FactSet also expects full-year earnings to range between $10.40 and $10.60 per share. That implies fiscal Q4 earnings of $2.41 to $2.61 per share. The consensus on Wall Street is for $2.54 per share.

The Q3 earnings were so strong that FactSet raised both ends of its full-year guidance by 55 cents per share. FactSet is our fourth-best stock this year. Through Thursday, FactSet is up over 24% for us. The company has raised its dividend every year since 1999.

Buy List Updates

Shares of Stryker (SYK) have been trending higher recently. The stock just hit a post-lockdown high, and it’s not far from its pre-lockdown high. This week, I’m lifting our Buy Below on Stryker to $220 per share. The next earnings report should be out in late October.

Becton, Dickinson (BDX) has been going through a rough patch. The stock is down close to 20% since the beginning of August. This week, the Wall Street Journal said that Becton’s coronavirus test is giving false-positive results. So far, the number of bad results is small, but it’s not good news. Becton is planning to ramp up its production of these tests to two million per week. I’m lowering our Buy Below on BDX to $250 per share.

Shares of Eagle Bancorp (EGBN) are sliding yet again. On Thursday, EGBN closed at $27.79 per share. That’s a six-month low. The stock is selling for roughly three-fourths of its book value. The dividend now yields 3.17%. I’m lowering our Buy Below price on Eagle to $31 per share.

Sherwin-Williams (SHW) has also been hot lately. This week, I’m bumping up its Buy Below to $720 per share.

That’s all for now. Next week will be pretty light as far as economic reports go. On Tuesday, we’ll get the report on existing-home sales. Thursday will be another report on initial jobless claims. Also on Thursday, the report on new-home sales comes out. On Friday, the report for durable goods is due out. Be sure to keep checking the blog for daily updates. I’ll have more market analysis for you in the next issue of CWS Market Review!

– Eddy

Morning News: September 18, 2020
Posted by Eddy Elfenbein on September 18th, 2020 at 7:02 am

Russia Hits Brakes on Rate Cuts, Sees Further Easing Possible

Fed Weighs Extending Bank Dividend Cap, Restarts Stress Test

Unemployment Claims Dip, But Layoffs Remain A Worry

Small Tech Stocks Soar as the Future Arrives Early

ByteDance Plans TikTok IPO To Win U.S. Deal As Deadline Looms

China’s Tencent Rebrands WeChat Work App Ahead of Trump Ban

Dollar Weakness, or Dollar Crash?

If Jerome Powell Has a Middle Name, It Might Well Be Bert

Here’s How Stimulus Checks Could Cost Americans In The Long Run

Nearly 60% of COVID-19 Business Closures Are Permanent

Worst Shipping Crisis in Decades Puts Lives and Trade at Risk

Joshua Brown: It’s Not “Stimulus” If It’s Open-Ended

Ben Carlson: How Are Institutional Investors Ever Going to Hit Their Return Targets?

Michael Batnick: Where Are They Going?

Howard Lindzon: Narvar Founder And CEO Amit Sharma Joins Me On Panic With Friends

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