Morning News: September 9, 2020
Posted by Eddy Elfenbein on September 9th, 2020 at 7:00 am

U.S. Businesses in China Not Heeding Trump’s Call to Return Home

Jerome Powell Channels Alan Greenspan in Putting Stamp on Fed

The Fed Enabled a Record Expansion. Trump Is Taking Credit.

The Largest Mortgage Origination Volume on Record

U.S. Regulator Calls Climate Change A Systemic Risk

Saudi Arabia Just Crushed U.S. Crude Oil Prices Again

Natural Gas Is the Rich World’s New Coal

Pandemic E-Commerce Surge Spurs Race For ‘Tesla-Like’ Electric Delivery Vans

$16 Billion Tiffany Deal Collapses Over Tariffs

Trapped by Pandemic, Ships’ Crews Fight Exhaustion and Despair

‘Mulan,’ Once a Sure Thing, Becomes a Problem for Disney

Nick Maggiulli: What Your Psychology Says About Your Relationship with Money

Michael Batnick: Will Money Printing Cause Inflation?

Joshua Brown: Tesla Snubbed (!) and the Nasdaq Whale Story

Howard Lindzon: Panic With Friends – Sean O’Brien Joins Me To Discuss Why Atlanta Is Absolutely Positioned To Be A Top-Tier Venture City

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Whither the P/E?
Posted by Eddy Elfenbein on September 8th, 2020 at 11:54 am

Why is the P/E Ratio so darned high? That’s a question that’s bedeviled analysts for many years, not just now.

As a stock-picker, I generally avoid such arguments. The stock market doesn’t need to “make sense.” The market gods have their reasons for doing whatever it is they do, even if it’s not entirely clear to us mortals. The judgments of the markets are true and righteous altogether.

The market’s sanity has especially been called into question lately because the market has done well even though the economy has not. The disconnect between Wall Street and Main Street has become a popular talking point.

As I’ve noted before, this disconnect should not alarm anyone. The stock market and economy have little reason to be strongly linked in the near term. We’ve experienced many such disconnects. One popular idea is that President Trump and, of course, “his cronies” are propping up the market for the election. I’m curious where this cabal was during February and March.

In any event, Alan Reynolds, a senior fellow at the Cato Institute, is the latest to take on this question. I should add that since Dow 36,000, conservative pundits have not had a particularly stellar track record in discussing market valuations. (By the way, here’s a brilliant critique of Dow 36,000 written by, as it turns out, me.)

Reynolds writes:

The argument for stocks being greatly “overvalued” rests on the fact that the trailing P/E ratio rose significantly from May 1 to September 1. On January 1, the P/E ratio was 24.21 –about the same as two years before (24.87). Even after Covid-19 and lockdowns crushed the economy, the P/E ratio was still 23.74 on April 1. Stock prices and earnings had both collapsed in sync. The P/E ratio was 25.10 on May 1 after the Fed funds rate fell to nil and the $1,200 checks and PPP loans peaked. It then rose to 26.69 on June 1, 27.57 on July 1, 28.31 on August 1 and 30.32 on September 1.

First, Reynolds points out that the inverse of the P/E Ratio, earnings over price, should generally follow bond yields. As bond yields have plunged, valuation should rise. Since the days of Alan Greenspan, this has often been called the Fed Model, though Reynolds believes he may have originally influenced the Maestro. They worked together on Reagan’s transition team.

Here’s a chart from Reynolds’s post:

Yes, they certainly do seem to match up. Reynolds also notes that the P/E Ratio falls when inflation rises. Therefore, he claims that Jerome Powell’s Jackson Hole speech, which outlined the Fed’s greater tolerance for inflation, could have been a negative for share prices.

While Reynolds says the lower bond yields justify the higher equity valuations, he says the Federal Reserve deserves zero credit since they were a laggard on lowering short-term rates.

The Federal Reserve can certainly crash the market (e.g., the double-dip recessions of 1980-82), but milder forms of Fed activism rarely explain bond yields or stock prices. The 10-year bond yield has at times risen 3.5 to 4 percentage points above the Fed funds rate, as in 1992, 2001-04 and 2010. Also, the S&P 500 stock index hovered at or below 2000 the last time the Fed kept the funds rate near zero in 2014-15, then rose 46% by July 2019 even as the Fed raised the funds target ten times to 2.5%.

Reynolds then gets to the key point that trailing P/E Ratios are higher but forward ratios may not be. We still don’t know.

I believe Reynolds errs on two key points. One oversight is noting which stocks are rising. There’s a tendency to treat the S&P 500 as if it’s one giant stock. It’s not. The Big Outside of a small group of tech stocks, the stock rally hasn’t been particularly impressive.

Here’s the S&P 500 Tech Index (red) along with the S&P 500 except tech (in blue).

The other point is dividends which are a key component of stock returns. On this point, short-term rates from the Fed have an impact though it’s a limited effect.

The Worst Time of the Year
Posted by Eddy Elfenbein on September 8th, 2020 at 9:54 am

Over the last 100 years, September has been the worst month for stocks. It’s also been the worst for the last 50 and last 100 years.

I’ve crunched the entire 124-year history of the Dow and here’s what the average year looks like:

You can see there’s a peak at the end of summer. From September 6 to September 30, the Dow has lost an average of 2.01%. That may not sound like a lot but it’s the average of 124 years of data. More than one-quarter of the Dow’s total gain has been wiped in a little over three weeks.

Tech Slumps Again
Posted by Eddy Elfenbein on September 8th, 2020 at 9:36 am

Tech stocks are down this morning. The fantastic rally in tech seems to be unwinding. There often seems to be a change in market sentiment after Labor Day.

Shares of Tesla were again snubbed by the S&P 500. Despite Tesla’s large size (market cap near $400 billion), the index keepers at S&P haven’t added it to their prestigious index. Also weighing on Tesla, GM took a $2 billion stake in Nikola. They’re going to partner together to make a pickup truck. Nikola is up 25% and GM is up 6%. Tesla is down 15%.

Ahead of Halloween, Hershey (HSY) is partnering with Google to use a person’s search history so they can tailor ads based on whether the person is likely to go out outside or not.

Hershey will tailor digital ads to households using search data provided by Google to overcome fresh challenges that threaten to derail this year’s Halloween.

The Pennsylvania-based candymaker struck a deal with Google last month for access to data showing whether people are more or less likely to go outside based on what they search for. For instance, a person who sought out business hours for nearby stores or vacation ideas suggests the likelihood to go outside.

Honestly, that sounds a little creepy.

Morning News: September 8, 2020
Posted by Eddy Elfenbein on September 8th, 2020 at 7:01 am

The Year That Hammered Global Trade Still Poses Five Big Risks

U.S. May Ban Cotton From Xinjiang Region of China Over Rights Concerns

Why Calls to Boycott ‘Mulan’ Over Concerns About China Are Growing

Exxon Downsizes Global Empire As Wall Street Worries About Dividend

U.S. Shale Producers Race For Federal Permits Ahead Of Presidential Election

Dear Wall Street, Your Boss Wants You to Come Back to the Office

The Two Men Buying Your Favorite Retailers

Move Aside Robots, Tesla Bets On Aluminium Casting

Tesla Shares Slump as S&P 500 Inclusion Remains Elusive

GM Venture’s Mini Car Becomes China’s Most Sold EV, Surpassing Tesla’s Model 3

Amazon Bans Sale of Foreign Seeds in the U.S.

Southwest Airlines Loses Another Competitive Advantage

The Next Pandemic Is Already Here

Ben Carlson: Why Even the Best Stocks Have to Crash

Howard Lindzon: Panic With Friends – Nicole Glaros Is The Chief Investment Strategy Officer at Techstars

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Morning News: September 7, 2020
Posted by Eddy Elfenbein on September 7th, 2020 at 7:12 am

Goldman Says Allure of Brexit Deal Hard to Resist for Johnson

Fed’s Strategy Shift to Bind Big Central Banks From Frankfurt to Tokyo

How A New Type of Money Helped Cause the Great Financial Crisis

The Service Economy Meltdown

The Options-Enhanced Stock Market Money Machine Is Going Global

The Fund Managers, The Sleuths And The Mystery Of The Missing ESG

Samsung Wins $6.6 Billion 5G Verizon Deal While Huawei Struggles

VW Says It May Soon Be Overtaking Tesla

Parents Got More Time Off. Then the Backlash Started.

Howard Lindzon: MTV 2.0

Joshua Brown: The Biggest Threat to Your Favorite Tech Stock

Michael Batnick: The Stock Split Bonanza

Roger Nusbaum: Dissecting Barron’s Retirement Cover Story

Jeff Miller: Weighing the Week Ahead: The Start of Something Big?

Ben Carlson: The Economics of Parenting & The New Fed Mandate: Full Employment & Asset Bubbles?

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August Jobs Report
Posted by Eddy Elfenbein on September 4th, 2020 at 8:35 am

Last month, the U.S. economy created 1.371 million new jobs. The unemployment rate fell to 8.4%.

In two months, the economy lost 22.16 million jobs. Over the last four months, we’ve gained back 10.61 million jobs.

The labor force participation rate is up to 61.73%, which is still very low. Before the pandemic, it was running around 63%.

The jobs-to-population ratio is at 56.5%. It was over 61% at the start of this year.

Here’s a chart of non-farm payroll:

Here’s the unemployment rate:

CWS Market Review – September 4, 2020
Posted by Eddy Elfenbein on September 4th, 2020 at 7:08 am

“Become more humble as the market goes your way.” – Bernard Baruch

After a spectacular run, the stock market suddenly got a case of the jitters on Thursday. Up until that point, the market had been enjoying an explosive rally.

The numbers are truly impressive. Last month was the best August for the S&P 500 in 36 years. Before Thursday’s swan dive, the index had rallied nine times in the previous 10 days. Going out further, the index closed higher 19 times in 25 days.

It seemed like the market was rising every day, and every day it was being led by the same big-name companies. Heck, Tesla closed higher not for anything they did but simply because they split their stock! (Elon, if you’re reading this, take note of this week’s epigraph.)

I suppose the bulls thought they had scared away the last bear. Not so! On Thursday, the S&P 500 got dinged for a 3.5% loss. That was more than four times worse than any other day in the last six weeks (which probably says more about the last six weeks than it does about Thursday).

Confused? Don’t worry. In this week’s issue, I’ll break down for you what’s happening. I’ll also highlight some recent economic news, which hasn’t been not terrible. I’ll explain what I mean. First, let’s look at Thursday’s Big Chill.

The Rally Finally Gets Some Pushback

One of the old chestnuts on Wall Street is that trends can last longer than you think. It’s natural for a market-watcher to think that some trend has finally exhausted itself, yet it still goes on. Thinking you can accurately spot the turning point is a dangerous game.

I’ve been thinking about this lately since Wall Street has fallen under the spell of a few select stocks. Earlier I mentioned Tesla. On Monday, the stock jumped more than 12% when the company split its stock 5-for-1. To be clear, nothing happened. A stock split has zero bearing on the underlying share price.

But Tesla doesn’t have shareholders, it has fan boys. TSLA is up more than 780% over the last 12 months. Here’s my favorite Tesla fact: the average share of Tesla is owned for ten days.

But even Tesla got caught up in the selling. From Tuesday’s high to Thursday’s low, shares of Tesla dropped 20%.

Check out the intra-day chart of the Nasdaq:

Zoom is another superstar stock that had a dramatic week this week. I would have to say that Zoom has probably been the stock that’s most emblematic of 2020. It’s reached the level of Xerox and Kleenex—the brand name is also the generic name.

On Tuesday, Zoom zoomed higher by more than 40%. The company reported earnings that demolished Wall Street’s estimates. For the most recent quarter, Zoom earned 92 cents per share. That more than doubled Wall Street’s consensus of 45 cents per share. This year, the stock is up 460%.

One interesting side note about Zoom. The company’s founder had his visa application rejected by the U.S. government eight times. On Tuesday, he made $6.6 billion.

But like Tesla, Zoom got tangled up in the selling. From Tuesday’s high to Thursday’s close, Zoom lost 22%, a drop similar to Tesla’s.

Apple Is Now Worth More than the Russell 2000

Shares of Apple also got a nice bump this week after they, too, did a stock split. At one point, Apple’s market value surpassed the market value of the Russell 2000. One company is worth more than an index of 2,000 stocks.

And like the others, Apple got a super-atomic wedgie on Thursday. The company lost a staggering $180 billion in market value.

In previous issues I’ve written about how the Big Five (Apple, Amazon, Facebook, Google and Microsoft) have nearly taken over the entire market. The companies are so big, and they’ve done so well, that they distort the rest of the market. These five companies now account for more than 20% of the S&P 500.

So much of the relative performance this year boils down to the question: do you have exposure to the Big Five (or Zoom or Tesla) or not? Our Buy List does not. Despite this, I’ve been impressed by the way we’ve held our own. For example, our Buy List is running ahead of the S&P 500 Equal Weight Index. That’s the regular S&P 500, but with every stock counting the same.

I have to explain that while our Buy List did reach new highs last week and this week, it generally lagged the market. That’s due to the nature of our stocks. Most of the stocks on our Buy List are stable companies and very high-quality. As such, they don’t quite ride the same updraft during a ferocious bull market such as we’ve had. Though to be clear, we’ve gone higher.

Conversely, when the market broke on Thursday, we also fell, but not as much as the overall market. Yesterday, 16 of our 25 stocks fell less than the overall market. Two stocks, Eagle Bancorp (EGBN) and AFLAC (AFL), actually closed higher.

Thursday was a good example of what market folks call a “contra-trend” day. That’s a fancy word meaning all the stuff that’s been doing great is having a rotten day. Meanwhile, all the stuff that’s been lagging is doing well.

Contra-trend rallies are typical within larger rallies, but we can’t say that this spells the end of the superstar stock rally. Clearly, there are nervous investors out there, and the bears have shown that they’re willing to push back.

There are parts of this market that have been almost entirely left behind by this rally. Value stocks, for example, haven’t done much. Here’s a chart of S&P 500 Value (blue) and S&P 500 Growth (black). Growth has outperformed Value, but the gap got dramatically wider this year.

If you look closely, at the end of the chart, Thursday’s drop is visible for Growth, but Value was impacted much more.

Also, the non-tech stocks in the S&P 500 haven’t done particularly well. There’s a decent chance that Thursday could mark the beginning of rotation away from the big Growth winners and toward the Value laggers.

As a very general rule of thumb, the Buy List keeps up with the overall market during bull markets. But during bear markets has been where we’ve set ourselves apart. That happened again earlier this year when the S&P 500 lost more than one-third of its value in just over a month.

The U.S. Economy Is Slowly Getting Better

I also wanted to touch on a few of the recent economic reports. There’s been some brighter economic news, but I have to put that in the context of a very distressing economy for so many. The economy is getting better, but we have a long way to go until we get back to normal.

Last week, the government revised Q2 GDP from an annualized decline of 32.9% to one of “just” 31.7%. In late October, we’ll get our first look at Q3 GDP.

The big August jobs report is due out later this morning. On Thursday, the ADP payroll report said that 428,000 private jobs were created last month. That was well short of Wall Street’s guess of 1.1 million. I should add that the ADP is not a good predictor of what the government’s report will say.

The most recent jobless-claims report came in at 881,000. That’s much better than Wall Street’s estimate of 950,000. This is the lowest initial-claims report since the lockdowns started nearly six months ago.

The Labor Department also changed its methodology which may have overstated the jobless claims earlier this year. Continuing claims fell to 13.254 million.

Factory orders for July rose by 6.4%. Perhaps the best news was the ISM Manufacturing Index. This week’s report came in at 56, which is its best reading in nearly two years. We also learned this week that home prices are rising at the fastest rate in nearly two years. That could be helping business for our friends at Trex (TREX).

That’s all for now. The stock market will be closed on Monday for Labor Day. There’s not much in the way of economic news next week, but there are a few items I want to highlight. On Tuesday, the consumer-credit report comes out. On Wednesday, we’ll get another report on job openings. Thursday we’ll get another jobless-claims report. Then on Friday, the latest CPI report is released. 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 4, 2020
Posted by Eddy Elfenbein on September 4th, 2020 at 7:01 am

Wall Street Has Its Worst Day in Months

Tech Selloff Seen as Removal of Froth Rather Than a Warning Sign

2016 All Over Again? Investors Ready For Big Market Moves As U.S. Election Nears

Unemployment Claims Show Layoffs Continue to Batter Economy

Unemployment Claims Improve But It’s a Manipulation Mirage

What the Fed’s New Long-Run Inflation Outlook Means for Your Portfolio

Central Bankers Aren’t Using Their Climate Superpowers Yet

Taking Power – Chinese Firm to Run Laos Electric Grid Amid Default Warnings

Justice Dept. Plans to File Antitrust Charges Against Google in Coming Weeks

The Fraud and Drug Binges That Helped Create a Billion-Dollar Shoe Company

‘Mulan’ Tests Subscribers’ Desire to Pay Up for Big-Budget Film

Nick Maggiulli: Why Do Poor People Stay Poor?

Cullen Roche: The COVID Price Compression in Technology

Howard Lindzon: Daddy…What’s a Bubble?

Ben Carlson: How Much Money Is Enough?

Be sure to follow me on Twitter.

A Contra-Trend Day
Posted by Eddy Elfenbein on September 3rd, 2020 at 1:30 pm

The market is finally down today. This is a good example of a contra-trend day. That’s when the opposite of everything that’s been happening happens.

Here’s one example: From Tuesday’s high to today’s close, Tesla is down 19%. Here’s another: Zoom is down over 20% over the same span.

How long will it last? That’s hard to say.

We got some good economic news this morning. The jobless-claims report came in at 881,000. That’s much better than Wall Street’s estimate of 950,000. This is the lowest initial claims report since the lockdowns started in March.

The Labor Department also changed its methodology which may have overstated the jobless claims earlier this year. Continuing claims fell to 13.254 million.
Tomorrow we’ll get the jobs report for August. For July, the unemployment rate was 10.2%.