CWS Market Review – August 14, 2020
Posted by Eddy Elfenbein on August 14th, 2020 at 7:08 am

“Big Stock Market Numbers!” – President Donald Trump

So tweeted the president, and he’s right. The stock market has been bigly strong recently. On Wednesday, the S&P 500 closed at its second-highest level ever. The index came close to marking a new all-time high on Wednesday and again on Thursday, but finished just shy of that record at the time the closing bell rang.

I’m pleased to report that our Buy List is doing well. In fact, we’re doing even better than the rest of the market. Through Thursday, our Buy List is up 6.63% on the year (not including dividends). That’s ahead of the S&P 500, which is up 4.42% on the year. It’s still close, so I’m not ready to declare victory just yet. But it does show you how much you can do by not doing anything except buy and hold good stocks.

We just wrapped up a very good earnings season. All of our stocks but one beat expectations, and the lone exception merely met expectations. In this week’s CWS Market Review, I’ll cover our final earnings report, which was from Broadridge Financial Solutions. The company beat earnings and raised its dividend, and the shares rallied to a new all-time high. Big numbers indeed. I’ll have all the details in a bit.

While the president might be pleased with the market, the overall U.S. economy is still in a difficult spot. In this issue, I’ll discuss the recent jobs report. This week, we saw the highest report for core consumer inflation in nearly 30 years. We also saw jobless claims finally fall below one million. That had not happened for 20 consecutive weeks. I’ll also preview next week’s earnings report from Ross Stores. But first, let’s take a closer look at the jobs report.

The Economy Created 1.8 Million New Jobs — and We Need More

Shortly after I sent you last week’s issue, the government reported that the U.S. economy created 1.763 million new jobs last month. The expectations had been for 1.48 million. More accurately, many folks were returning to their own jobs that got axed during the lockdown. Still, it’s good to see the numbers going in the right direction.

These are huge gains in employment, but it comes after even larger losses. To be sure, the economy is a long way from where it was just six months ago. The unemployment rate is down to 10.2%. We’ve had recessions that peaked with lower unemployment rates. The number of unemployed people dropped by 1.4 million to 16.3 million.

The labor-force participation rate is 61.4%, which isn’t as bad as I had expected. Average hourly earnings rose by 0.2%. Here’s a look at nonfarm payrolls:

I’ll be frank: these numbers really aren’t about economics. They’re about the coronavirus. Where the economy is allowed to work, it can. In areas that are still locked down, it can’t.

I’m far from an immunologist, but the trends appear to be favorable. In Florida, for example, which saw a big run-up of new cases in June and July, the numbers are clearly trending downward.

For example, let’s look at leisure and hospitality, which is a crucial sector for the economy. Leisure and hospitality added 592,000 jobs in July. In May and June, the sector added 3.4 million jobs. That sounds impressive, but leisure and hospitality lost over 8.3 million jobs in March and April.

We had more good news for the jobs market on Thursday when the jobless-claims report finally fell below one million. The number of folks filing for jobless benefits fell to 963,000. That’s the first time in 20 weeks it came in under one million. Economists had been expecting 1.1 million.

While the jobs market is better, there’s still a long, long way to go.

I was most surprised this week by the strong CPI report. On Wednesday, the government reported that consumer prices rose by 0.59% in July. That was the largest monthly increase in 11 years. Wall Street had been expecting an increase of 0.3%.

This comes after a 0.57% increase in June. Before that, we had three straight months of lower prices, better known as deflation.

Wednesday’s report also showed that “core” consumer prices, which exclude volatile food and energy prices, rose by 0.62%. That’s the largest increase since January 1991. The core rate had also dropped in March, April and May, so this could be simple mean reversion.

There appears to be some nascent optimism for the U.S. economy. The housing market, for example, appears to be doing well. Also, bond yields are creeping higher. On August 4, the 10-year Treasury yield got down to 0.52%. Deutsche Bank said that Treasury yields were at a 234-year low. On Thursday, the 10-year yield got to 0.71%.

We’re also seeing another move towards cyclical stocks. By this, I mean stocks whose fortunes are closely tied to the broader economy. When cyclicals do well, that’s often—though not always—a harbinger of an improving economy.

A few weeks ago, there was a similar turn to cyclicals, but it didn’t last (see our June 5 issue). Alas, head fakes are common on Wall Street. We’re seeing another one. In fact, Industrials have actually outperformed Tech over the last three months. I would not have guessed that. Perhaps Wall Street is sensing that the economy will reopen sooner than expected.

Earlier I mentioned that the S&P 500 is up 4.42% this year. As it turns out, that’s nearly the exact long-term average for this point in the year. We’ve seen typical returns for this most atypical year.

Now let’s look at our last earnings report for the Q2 earning season.

Broadridge Beats Earnings, Raises Dividend and Hits New High

On Tuesday morning, Broadridge Financial Solutions (BR) became our final stock to report this earnings season. I had been a little nervous because Broadridge’s last earnings report was somewhat mediocre, and the one prior to that was a dud. The company missed earnings three times in a row.

I was relieved to see that this report was a good one. For its fiscal Q4, BR’s earnings rose 25% to $2.15 per share, which beat estimates by six cents per share. Recurring revenue, which is a key stat for them, rose 14% to $930 million.

Broadridge also offered guidance. For the new fiscal year, which ends on June 30, Broadridge expects earnings growth of 4% to 10%. Since the company made $5.03 per share last year, breaking out the math, that implies earnings this year between $5.23 and $5.53 per share. Wall Street had been expecting $5.44 per share.

The company also increased its quarterly dividend from 54 cents to 57.5 cents per share. That’s a 6.5% increase. This is BR’s 14th consecutive annual dividend increase. It’s not a big dividend. Based on Thursday’s close, the dividend yields 1.66%. Still, it’s better than most anything you can find in fixed income.

The shares jumped nearly 6% during the day on Tuesday and got to a new 52-week high. This week, I’m raising my Buy Below on Broadridge to $150 per share.

Earnings Preview for Ross Stores

That’s it for Q2 earnings, but we’ll soon get the earnings reports for companies with reporting quarters ending in July. We only have two such stocks on our Buy List. Hormel Foods (HRL) will report on August 25. The other, Ross Stores, will report next Thursday, August 20.

Ross Stores (ROST) is in a difficult situation. Fundamentally, it’s a sound company. However, the economic lockdown has been hard on them. Some of our Buy List stocks have been able to muddle through, but Ross has had many of its stores shut down. In fact, one of Ross’s competitors, Stein Mart, just went bankrupt.

At one point, Ross had shut all of its stores. For fiscal Q1, which ended on May 2, Ross reported a loss of 87 cents per share. Sales fell by half. The deep-discounter halted its dividend and share buybacks. None of this, however, is a reflection on the business.

The same factors hold sway over the upcoming earnings report. For its part, Wall Street expects a loss of 30 cents per share. The good news is that Ross has the money to ride this out. The company drew on its $800 million revolving-credit facility. Ross also completed a $2 billion bond offering. I’m confident Ross Stores will make a nice profit once it’s allowed to make one.

Buy List Updates

Good news from AFLAC (AFL). The duck stock said it’s going to increase its buyback authorization by 100 million shares. The current authorization is down to 21.9 million shares.

AFLAC is one of the few companies that actually reduces its share count. Many other companies buy back stock but then give executive stock options at the same time, so the funds bypass the shareholders. I’m lifting our Buy Below on AFLAC to $40 per share.

Last week, Intercontinental Exchange (ICE) said that it will buy Ellie Mae, a mortgage-services provider, for $11 billion.

ICE is buying Ellie Mae from Thoma Bravo, a private company. This is a nice pay day for them since they bought Ellie Mae last year for $3.7 billion. The deal will mostly be in cash and some will be in ICE stock.

Bloomberg had an interesting article on Bob Chapek, Disney’s (DIS) new CEO. Bloomberg describes Chapek as “using the Covid-19 crisis to transform Disney much faster than expected, all with an eye toward making the company an online juggernaut that reaches far more people worldwide.” Check it out.

That’s all for now. There’s not much in the way of economic news next week. On Tuesday, the report on housing starts is released. This is usually a good indicator of the housing market. On Wednesday, the Fed will release the minutes of its last meeting. The Fed members appear to be united in their current approach. On Thursday, we’ll get another jobless-claims report. 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: August 14, 2020
Posted by Eddy Elfenbein on August 14th, 2020 at 7:02 am

Gold Fever Spurs Dollar Oddity Not Seen Since Erdogan Took Power

A Faltering U.S.-China Trade Deal Is Now The Nations’ Strongest Link

China’s Economic Recovery Underwhelms As Consumer Comeback Stays Elusive

Stimulus Talks Are Stuck in $1 Trillion Ditch Over Aid to States

America’s Retirement Race Gap, and Ideas for Closing It

Goldman Sees Room for S&P to Surpass 3,600

Trump Administration Criticizes New Fannie Mae, Freddie Mac Mortgage Fee

U.S. Faces Bumpy Antitrust Road Despite Big Tech’s Emails, Memos

Fortnite Creator Sues Apple and Google After Ban From App Stores

TikTok Looks Like a Dangerous Dance Move for Nadella’s Microsoft

A Century-Old Moving Company Says the Summer of Covid Is ‘Insane’

Trump’s Labor Chief Accused of Intervening in Oracle Pay Bias Case

Ben Carlson: The Hardest Investing Questions to Answer

Michael Batnick: Bye Bye, New York

Joshua Brown: 10 Years Ago & Dollar Plays

Be sure to follow me on Twitter.

Jobless Claims Drop Below One Million
Posted by Eddy Elfenbein on August 13th, 2020 at 11:35 am

This morning’s jobless claims report fell to 963,000. This is the first time in 20 weeks that it was below one million. Economists had been expecting 1.1 million.

While the sub-1 million reading marks a milestone, there’s still plenty of work to do for the job market to get back to normal. Those collecting benefits for at least two weeks, known as continuing claims, totaled nearly 15.5 million, a decrease of 604,000 from a week ago but still well above pre-pandemic levels.

“The labor market continues to improve, but unemployment remains a huge problem for the U.S. economy,” wrote Gus Faucher, chief economist at PNC Financial Services. “The number of people filing for unemployment insurance, both regular and PUA benefits, continues to steadily decline as layoffs abate. But job losses remain extremely elevated, far above their pre-pandemic level.”

Yesterday, the S&P 500 got as high as 3,387.89, which was above the highest all-time closing number for the index. However, by the closing bell, the S&P 500 came just shy of a new record. The market is mostly flat so far today.

One quick factoid: Industrial stocks (red) have slightly edged out tech stocks (blue) over the past several weeks. I would not have guessed that.

Morning News: August 13, 2020
Posted by Eddy Elfenbein on August 13th, 2020 at 7:04 am

A Collapsing Economy And A Family Feud Pile Pressure on Syria’s Assad

In China, Fears of Financial Iron Curtain As U.S. Tensions Rise

Trump, Pelosi Make Opposing Economic Bets in Stimulus Standoff

A $2 Trillion Credit Boom Leaves America’s Smaller Firms Behind

Google, Facebook and Others Broaden Group to Secure U.S. Election

Postponed College Football Games Could Disrupt $1 Billion in TV Ads

Apple Readies ‘Apple One’ Subscription Bundles to Boost Services

Staffing Woes Put U.S. Car Industry’s Remarkable Rebound at Risk

REI Built an Elaborate HQ. Because of Covid-19, the Outdoor Retailer Wants to Sell It

Norwegian Taxis, Wirelessly Charging While They Wait For A Fare

Bankrupt Brooks Brothers Finds a Buyer

Cullen Roche: Three Things I Think I Think – Moar Stuff

Jeff Miller: Investing for the Long Run: The Challenge of a Bifurcated Market

Joshua Brown: Shade of the Week & Talent

Ben Carlson: The Smart Money

Howard Lindzon: Delay The A – William Libby Of Upper 90 Joins Me On Panic With Friends

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The Stock Market and 30-Year TIPs Yields
Posted by Eddy Elfenbein on August 12th, 2020 at 9:29 pm

Here’s an update to some studies I’ve done before. I like to see how well the stock market has performed at different levels of interest rates. I’ve also done It for TIPs yields, which are inflation-protected Treasury bonds.

The problem with TIPs is that the data doesn’t go back very far. What data we do have gives us a clear picture that stocks have done better when TIPs yields are lower. This makes sense so it’s good to see the numbers bear it out.

At the St. Louis Fed’s database, they have TIPs yields data for the five-, seven-, 10- and 20-year Treasuries going back over 16 years.

However, the one I wanted to test was the 30-year. That data only starts in February 2010. I ran the numbers and compared the 30-year TIPs to the stock market. I used the Wilshire 5000 Total Return index for stocks.

As it turns out, 1% is a nice dividing line. Since 2010, the 30-year TIPs yield has been 1.00% or higher, 42% of the time. It’s been 0.99% or lower, 58% of the time.

When the 30-year TIPs yield is 1.00% or more, the stock market has averaged an annual return of 3.02%. That’s probably less than how well TIPs performed. In other words, cash was king.

But when the 30-year TIPs yield was 0.99% or less, the stock market averaged an annual return of 22.01%. That’s quite a spread.

For context, the 30-year TIPs yield has been below 1% continuously for the last 16 months. It recently struck an all-time low of -0.46%. It’s now up to -0.37%.

This relationship seems quite obvious to me. I suspect this comparison will become more popular as we get more TIPs data.

Strongest Core Inflation in 30 Years
Posted by Eddy Elfenbein on August 12th, 2020 at 10:30 am

This morning’s CPI report showed that consumer prices increased by 0.6% last months. That’s on top of a 0.6% increase in June. Wall Street had been expecting an increase of 0.3% for July. The increase for July was the strongest in 11 years.

The “core rate,” which excludes volatile food and energy prices, also rose by 0.6%. That’s the largest increase since January 1991.

A few news items. AFLAC (AFL) increased its buyback authorization by 100 million shares. That’s on top of the previous authorization which was down to 21.9 million shares.

Hormel Foods (HRL) said it will release its earnings before the market opens on August 25. The stock is at a new high today along with FactSet (FDS), Stepan (SCL) and Sherwin-Williams (SHW).

Here’s a Bloomberg article on Disney’s (DIS) new CEO.

Intercontinental Exchange (ICE) said last week that it will buy Ellie Mae, a mortgage services provider, for $11 billion.

Morning News: August 12, 2020
Posted by Eddy Elfenbein on August 12th, 2020 at 7:03 am

UK Enters Recession After GDP Plunged By A Record 20.4% In The Second Quarter

Gold’s Wild Ride Continues as Prices Bounce Back

Trump Pledges Big Tax Cuts That May End Up Nowhere as Stimulus

Investors Revalue Chinese Tech Giants After U.S. Ban

U.S. Ban On TikTok Could Cut It Off From App Stores, Advertisers

Disney’s CEO Is Scrapping Once-Sacred Businesses

Tesla Splits Stock to Make Lofty Shares Attainable Again

In Victory for Qualcomm, Appeals Court Throws Out Antitrust Ruling

Games Help Tencent Smash Second-Quarter Earnings Expectations As Potential WeChat Ban Looms

Coronavirus Tests the Leadership Style of Goldman Sachs’s C.E.O.

Kodak Raised Spending On Lobbying Government In Months Before Loan Awarded

Six Things You’re Doing Wrong When Buying Stocks On Your Own

Ben Carlson: The Pros and Cons of Miniscule Savings Account Yields

Nick Maggiulli: The Definitive Guide to the All Weather Portfolio

Joshua Brown: Nasdaq Is The New S&P 500

Michael Batnick: The Investor’s Dilemma

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Broadridge Beats Earnings and Hikes Dividend
Posted by Eddy Elfenbein on August 11th, 2020 at 11:29 am

This morning, Broadridge Financial Solutions (BR) released a solid earnings report. For its fiscal Q4, BR’s earnings rose 25% to $2.15 per share which beat estimates by six cents per share. Recurring revenue, which is a key stat for them, rose 14% to $930 million.

Let’s look at guidance. For the new fiscal year, which ends on June 30, Broadridge expects earnings growth of 4% to 10%. Since the company made $5.03 per share last year, that implies earnings this year between $5.23 and $5.53 per share. Wall Street had been expecting $5.44 per share.

The company also increased its quarterly dividend from 54 cents to 57.5 cents per share. That’s a 6.5% increase. This is BR’s 14th consecutive annual dividend increase.

The stock has been up as much as 5.8% today and it reached a new 52-week high.

Q2 2020 Earnings Calendar
Posted by Eddy Elfenbein on August 11th, 2020 at 8:05 am

Twenty-two of our 25 Buy List stocks have reported their Q2 earnings during this earnings season. Here’s a list of reporting dates, Wall Street’s consensus estimates and actual reported results.

Morning News: August 11, 2020
Posted by Eddy Elfenbein on August 11th, 2020 at 7:07 am

An 1,100% Stock Gain Is Hong Kong’s New Protest Rallying Cry

China Is Ditching Expensive Brazilian Soybeans for U.S. Supplies

S&P 500 Futures Hit Record High on Stimulus Bets

Millions Turn To Stock Trading During Pandemic, But Some See Trouble For The Young

Trump Says He’s Considering Capital Gains Tax Cut

Trump’s COVID Orders Too Little, Too Late To Help U.S. Economy, Experts Say

To Withhold or Not: Trump’s Order Gives Employers a New Dilemma

Dimon, Bezos Among CEOs Pledging to Hire 100,000 New Yorkers

Black Finance Workers in London Face ‘Dire’ Prospects Despite CEO Pledges

SoftBank Touts Vision Fund Gains, Ditches Operating Profit As Yardstick

Delta Air Lines Bought an Oil Refinery. It Didn’t Go as Planned.

Start-Ups Braced for the Worst. The Worst Never Came.

After a Flop, Amazon Makes Another Foray Into Video Games

Ben Carlson: Which Investments Benefit From a Weaker Dollar?

Howard Lindzon: Starting a Company? Let’s Do A Priced Round

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