Morning News: June 17, 2020
Posted by Eddy Elfenbein on June 17th, 2020 at 7:03 am

Saudi Aramco Completes $69 Billion SABIC Stake Deal, Extends Schedule

The I.P.O. Comes Roaring Back in the Pandemic

May Flowers: Where the U.S. Retail Blooms Are And Are Not

Hertz’s Crazy Idea Will Cost Speculators Millions

The Rich Cut Their Spending. That Has Hurt All the Workers Who Count on It.

Trump Administration’s Nominee for Development Bank Chief Breaks With Protocol

Trillions in Stimulus Go Unchecked With Watchdogs Kept Toothless

Apple’s Dominance Is Finally Under Threat

Former Bumble Bee C.E.O. Is Sentenced in Tuna Price-Fixing Scheme

PG&E Pleads Guilty to 84 Counts of Manslaughter in Camp Fire Case

Nick Maggiulli: Why So Many People Are Getting into the Stock Market

Ben Carlson: How Will Private Equity Work in 401ks?

Roger Nusbaum: The Panic Has Subsided For Now

Howard Lindzon: The Gap Year

Joshua Brown: Feelings Drive Short-Term Prices & One Fifth of Investors Sold All Their Stocks

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Market Jumps on Strong Retail Sales Report
Posted by Eddy Elfenbein on June 16th, 2020 at 11:07 am

The market is having a nice morning thanks to a good retail sales report. The government said that retail sales rose 17.7% in May. Economists had been expecting a gain of “only” 7.7%.

You don’t often see a retail sales report beat expectations by 10%.

There were also reports on the benefits of dexamethasone. Apparently, the drug was shown to reduce Covid-19 deaths by one third.

From the BBC, “Had the drug had been used to treat patients in the UK from the start of the pandemic, up to 5,000 lives could have been saved, researchers say.”

At one point, the S&P 500 was up close to 3% but it’s pared those gains. The index is currently up just under 1%.

Morning News: June 16, 2020
Posted by Eddy Elfenbein on June 16th, 2020 at 7:02 am

U.S. Slumps to 10th Spot in World Competitiveness Rankings

U.S. Expected to Report Record Rise In Monthly Retail Sales

As Meat Plants Stayed Open to Feed Americans, Exports to China Surged

The Fed Says It Is Going To Start Buying Individual Corporate Bonds

Trump Team Weighs $1 Trillion for Infrastructure to Spur Economy

To Gain Public’s Trust, Should Members of Congress Stop Trading Stock?

An LGBT Landmark

Coronavirus Economy Especially Harsh for Transgender People

Apple Just Got Hit With 2 EU Antitrust Probes Into the App Store and Apple Pay

Chesapeake Energy To File For Bankruptcy As Soon As This Week

The Spectacular 955% Surge of a Debt-Ridden Shipbuilder’s Stock

Has Pandemic Snacking Lured Us Back to Big Food and Bad Habits?

Most Coronavirus Tests Cost About $100. Why Did One Cost $2,315?

Top Business Schools That May Best Prepare Grads for a Covid-19 World

Howard Lindzon: Momentum Monday – Stonks Go Down

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A Bad Omen in China
Posted by Eddy Elfenbein on June 15th, 2020 at 11:05 am

The stock market is down again today. This could be our fourth drop in the last five sessions. Things seemed to have turned since the Fed meeting last week. Of course, that comes after more than two months of solid wins for the bulls.

The S&P 500 is below its 200-day moving average and the 50-day isn’t far away.

Not much economic news this morning. The New York Fed’s Empire State Manufacturing Survey said that business activity in New York State steadied in June. That’s a hopeful sign.

Bloomberg has an interesting article noting that the fragile nature of the Chinese economic recovery points to how difficult it may be for the entire world economy to recover.

A string of top-tier data all showed that China’s factory output, consumer spending and investment continued to improve in May, but there are few signs of a broad based rebound needed to spur a V-shaped recovery.

The worry for the global economy is that if China’s apparent success in containing the coronavirus can’t stoke confidence and a quick return to normal activity, then where can. Those concerns will be compounded by news of an outbreak of virus cases in Beijing that has raised fears of a resurgence of the pandemic.

“China’s experience so far suggests that it will be a hard road back for the global economy,” said Shaun Roache, Asia-Pacific chief economist at S&P Global Ratings, who notes that confidence among Chinese consumers and privately-owned firms remains low. “We still expect a rebound in the second half, but expectations for a surge in pent-up demand may be disappointed.”

Morning News: June 15, 2020
Posted by Eddy Elfenbein on June 15th, 2020 at 7:04 am

Mexico’s Oil Hedge To Be Pricier, But Government Likely Doing It Anyway

BP Cuts Up To $17.5 Billion From Assets’ Value With Bleaker Oil Outlook

China’s Slow Recovery Points to Hard Road Back for Global Economy

Break the China Habit? Lobsters, Lights and Toilets Show How Hard It Is

Don’t Cheer Too Soon. Keep an Eye on the Core Jobless Rate.

Goldman Says Mom-and-Pop’s Stock Picks Are Trouncing Wall Street

Morgan Stanley Economists Double Down on V-Shape Global Recovery

Trading Sportsbooks for Brokerages, Bored Bettors Wager on Stocks

Nissan Email Trail Casts New Light on Takedown of Carlos Ghosn

Michael Batnick: Animal Spirits: Investing in Private Real Estate With FundRise & Who’s Driving the Stock Market?

Ben Carlson: Is This The Most Volatile Year Ever? & Why the Market is So Confused Right Now

Roger Nusbaum: A Closer Look At Long/Short Strategies

Jeff Miller: Weighing the Week(s) Ahead: Can Investors Depend on the Rebound Trend?

Howard Lindzon: A Few Days Of Fintech With Friends

Joshua Brown: Listen to Jeremy Grantham Explain the Slow Death of Value Investing Better Than Anyone, Unheard Of & Frank Partnoy on the Hidden Systemic Risk Of Leveraged Loans

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Making My Own Dice Baseball Game
Posted by Eddy Elfenbein on June 13th, 2020 at 4:26 pm

The idea of creating simulation baseball games based on playing dice is an old one. There are some versions that date from the 19th century. There are many different versions currently on the market. The basic idea is that the outcome of every plate appearance is determined by a roll of dice.

I wanted to try my hand and devise my own version.

My goal was two-fold. I wanted to create a dice baseball game that’s reasonably accurate to real baseball but also easy to play.

There are games on the market that are mind-numbingly complex, and in my opinion, not very fun. YouTube has some videos of people playing these games, and you’d think it’s someone doing their taxes. I didn’t want that.

My first goal was to use the “craps” version of dice. By that, I mean you simply throw two dice and add the results together. Just like craps. Other games are based on certain dice combinations. For example, a 1 and a 4 means this or a 2 and a 5 means that. That’s another thing I didn’t want.

I wanted something easy. Roll dice and boom, see the play. No charts or forms. Nothing to look up and no extra dice.

I also wanted a higher number to mean a better the result. That makes the game simple and intuitive.

With that being said, here’s my version. This is the outcome for each roll of the dice.

Now for some explanation. The Sac Fly is only in play when there’s a runner on third with less than two outs. The other runners do not advance. If no one’s on third, then it’s a regular deep fly.

The GDP is only a double play when there’s a man on first with less than two outs. The other runners advance. If no one’s on first, then it’s a regular ground out and the other runners do not advance.

With the regular single, the runners on base advance one base. With the single-plus, runners on base advance two bases. With a double, runners on base advance two bases.

You may have noticed a few quirks in my version. For example, there are no triples. Sorry, but they’re just too rare in modern baseball.

I also didn’t have any sac bunts. Those don’t happen very often in real baseball and when they do, it’s usually the pitcher in the batter’s box. There are also no errors, and I didn’t include stolen bases. If you want to add them, knock yourself out.

Now for some basic stats. Rolling two six-sided dice gives you 36 different outcomes. Here are the probabilities for each roll:

Using that, we can see that my rules produce an OBA of 0.361 (or 13/36), a batting average of 0.303 (or 10/33) and a slugging percentage of 0.455 (or 15/33). The OPS comes to 0.816. That’s higher than the average in real baseball but I wanted to make my game a little offensive heavy.

Those numbers aren’t exactly right because we still need to adjust for Sac Flies. Under baseball’s rules, a SF counts as a plate appearance but not an at bat.

How do we calculate the expected number of Sac Flies? Thankfully, my nephew knows some computer programming and we ran a simulated 1,000,000 innings. Based on that, a SF comes along once in every 113 plate appearances. That boosts our batting average to 0.306. On-base stays the same, but slugging percentage rises to 0.460. The OPS increases to 0.821.

We found that my rules produce an average of 5.07 runs per nine innings. That’s about 8% higher than the average of the last 30 years. As a general rule, my version gets more people on base but doesn’t move them across the basepaths as much.

If you’re curious, the odds of a pitcher throwing a no-hitter are one in every 17,109 while a perfect game would be one in 179,273. Since 1876, there have been about 232,000 games played.

Extra

A few years ago, “The Riddler” at FiveThirtyEight once ran a contest on devising a dice baseball game. Here’s the winning submission.

Here’s a variant I came up with that’s a little closer to actual baseball. Personally, I don’t like the erratic jumble of results.

You can get more accurate by getting more complicated, but I think my version is best combination of simplicity and accuracy.

Baseball Solitaire
Posted by Eddy Elfenbein on June 13th, 2020 at 10:13 am

Since it’s a weekend in June and we don’t have baseball, I thought I’d share with you a game I invented when I was a kid. It’s a simulation baseball game that uses a regular deck of playing cards.

It’s a lot of fun and the rules are easy. Each card represents a plate appearance.

Here’s the breakdown.

Some explanation. The plus on 1B+ and 2B+ means that baserunners take an extra base (ie, a seven of hearts will score a guy on second, but a five of hearts does not).

The GDP is a normal out, but a double play is there’s a guy on first with less than two outs. Same for the SF. It’s a sac fly if there’s a man on third with less than two outs.

The other baserunners don’t advance on a SF, but they do in a GDP. I don’t know why I keep the latter rule, but it seems more fun that way.

Like I said, it’s simple and a lot of fun, especially once you internalize the system. Feel free to adjust the rules as you see fit.

Some technical stuff.

The game doesn’t perfectly match a baseball, but it’s reasonably close (hey, I was a kid). BA is .271, OBA is .327, SLG is .438 and OPS is .764 That’s not bad for such a simple game. Technically, the batting average is a little higher since sac flies don’t count as much at bat do as plate appearances. My guess is with the adjustment, it’s about .273, so not much of a difference.

I estimate that runs per nine innings is about 4.1 or 4.2. That’s just a guess. That’s about 0.5 lower than the OPS would imply. I assume that no errors or SB account for the difference, but I’m not sure.

I reshuffle after every three innings. That means about half the deck is used.

When I was a kid, I played this for hours and hours. I’ve recreated dozens of World Series and all-star games. I’ve managed my own teams and conducted trades. Have I run through an entire 162-game season and kept the stats? Um…no comment.

I’ve played some truly amazing games with wild comebacks. It’s all based on playing cards and my imagination.

If you’re missing baseball this year, give my baseball solitaire a shot. Warning: You might become an addict.

CWS Market Review – June 12, 2020
Posted by Eddy Elfenbein on June 12th, 2020 at 7:08 am

”We’re not even thinking about thinking about raising rates.” – Fed Chairman Jerome Powell

Last week’s issue of CWS Market Review was unusually prophetic. I said there’s a good chance that our Buy List would soon be positive for the year. Indeed, that happened two days later.

In that issue, I also said that the National Bureau for Economic Research might confirm the start of the recession before the end of the year. They did it on Monday. The expansion lasted 128 months.

I also noted that the Nasdaq Composite had just made a new all-time high. This week, the index went on to break 10,000 for the first time ever. The index started life in 1971 at 100. It took nearly 50 years to become a 100-bagger.

I also discussed the recent surge in cyclical stocks and wondered if the cycle had finally turned. On Thursday, however, cyclical stocks were severely punished as the market suffered its worst day in nearly three months. The S&P 500 plunged by 5.89% to close just above 3,000.

What caused the selling? We can point our fingers at the Federal Reserve, which met this week. Chairman Jerome Powell’s pessimistic outlook threw cold water on the market’s recent rally. There are also concerns that the long-feared “second wave” is starting to form.

On Thursday, the S&P 500 fell for the third day in a row. A three-day losing streak isn’t that big a deal, but we haven’t had one in 94 calendar days. That’s an usually long stretch. I guess we were due for one, and it came hard. In this week’s issue, I want to take a closer look at what’s been happening to the market and what we can expect going forward.

Cyclicals Get Crushed

One of the keys to understanding the stock market and investing is that the market tends to move in broad cycles. This happens as the market gets attached to a thesis. Let’s say the market convinces itself that the economy is gradually improving.

With that, we’ll see a fairly standard playbook. A rising market. Leadership from industrials and cyclicals. Lower bond prices. Higher yields and higher commodity prices. Greater pressure on the Fed to raise rates.

That’s the standard. Of course, each cycle will have its own peculiarities. Since March 23, the strong rally has been based on the idea of a diminishing threat from the coronavirus. Of course, that thesis isn’t completely unexpected since the rally is largely reversing the bear market which the coronavirus first caused. X is followed by negative X.

Here’s a good example of what I mean. This is a chart of the Zoom Video Communications (ZM) divided by the S&P 500 ETF, along with Middleby (MIDD) divided by the S&P 500 ETF.

When the lines are rising that means those stocks are beating the market. Conversely, when they’re falling, they’re lagging the market. If you examine the charts, you’ll notice that they tend to move in opposite directions. That’s the key point I want to get across.

In the age of the coronavirus, these two stocks are nearly polar opposites. I chose Zoom because it’s profited greatly from the lockdown, whereas Middleby has suffered. What’s been good news for one has been bad news for the other. (Zoom, truthfully, probably isn’t the best example for this exercise because the bullish trend has been so powerful, but even so, the cycle is still visible.)

Once these cycles get established, there will be strong contra-trend days. That’s a fancy word to say that everything that had been doing well gets crushed one day. At the same time, all the laggards suddenly find themselves in the spotlight. Or to quote more authoritatively, “So the last shall be first, and the first last.” As the thesis of the rally is debated on Wall Street, we’ll constantly see a tug-of-war between trend and contra-trend.

That’s exactly what we got on Thursday. It was a classic contra-trend rally. I’ll give you an example. If we look at High Beta stocks, these are stocks that tend to move around the most, and they got crushed. The S&P 500 High Beta Index lost more than 10% on Thursday. The High Beta sector is close to being an all-purpose anti-Covid sector. Whenever news breaks that the virus is fading, you can be sure High Beta will shine.

Within the stock sectors, the biggest loser was energy stocks. The S&P 500 energy sector lost over 9% on Thursday. In fact, the four worst-performing sectors on Thursday were (in order) Energy, Financials, Materials and Industrials. If you recall, these are the exact four that I told you last week comprise the cyclicals universe.

It’s these cyclical stocks that had performed so well that got their heads chopped off on Thursday. The price action on Thursday wasn’t a minor pushback, either. The bears gave these stocks a super-atomic wedgie. Callie Cox noted that on the NYSE, decliners led advancers by 1,800. That’s the most in nearly five years. In other words, the bears were going after everyone.

Last week, I asked if the cycle has finally turned. This week told us, “maybe not.” I wish I could be more emphatic in my predictions, but the facts won’t allow for it. Until we know more, we should maintain a conservative approach to our investments. Three of our stocks that look particularly good right now are Stepan (SCL), Middleby (MIDD) and Stryker (SYK).

Mr. Powell Spooks the Market

As I mentioned earlier, the Federal Reserve got together this week. On Wednesday, the Fed released its policy statement. As expected, there wasn’t any change to its policy. Rates are already rock bottom, and I doubt they’ll soon go negative.

What caught Wall Street’s attention were comments made by the Fed Chairman in his post-meeting press conference. Jerome Powell was unusually blunt. He said the Fed isn’t “even thinking about raising interest rates.” The Fed probably sees rates staying near 0% through this year, next year and the year after that. On top of that, the Fed will most likely continue to buy up bonds at a frenetic pace. Central bankers rarely speak so forthrightly.

This is somewhat ironic in that Mr. Powell was often harshly criticized by President Trump (who appointed him) for not lowering rates. There’s another story going on. A lot of the Fed’s job involves signaling. Right now, the Fed wants to make it clear to Wall Street that it will not stand in the way of any nascent recovery. Wall Street took the message to mean that the economy is more precarious than the bulls believe. Then on Thursday, it was as if three months of frustration from the bears came out all at once.

One big change between now and the market in March is that daily volatility has dropped significantly. The Fed also released its economic projections for the next few years. The central bank forecasts a very robust recovery. Of course, that’s coming off a very steep low.

The economic news is still quite scary. The latest jobless-claims report came in at 1.542 million. That’s the tenth weekly decline in a row. There was good news in last Friday’s jobs report. It showed an increase of 2.5 million jobs, although the Bureau of Labor Statistics conceded there were some errors in this report. We’ll have more details next month. (It’s not some conspiracy. It’s just hard to get the right data during extreme events.)

On Wednesday, we learned that consumer prices fell again last month. That’s the third monthly decline in a row. The good news is that we’re not too far from the normal range. My fear was that we could be near a deflation spiral where lower prices begat even lower prices. Things are getting back to normal, but it will take time.

That’s all for now. On Tuesday, we’ll get the retail-sales report for May. The previous report was terrible. Hopefully, that was the nadir. We’ll also get the latest report on industrial production. Then on Wednesday, we’ll have the latest report on new-home sales. Thursday, of course, will be another report on jobless claims. 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: June 12, 2020
Posted by Eddy Elfenbein on June 12th, 2020 at 6:46 am

U.K. Economy Plunges by Record 20%

Lebanon’s Currency Plunges, and Protesters Surge Into Streets

Investors, No Longer in Denial About Grim Outlook, Drive Market Down

U.S. Manufacturers Struggle To Keep Workers In Face Of Weak Demand

What Rebound? North Dakota In Economic Crunch As Virus Batters Oil, Agriculture

‘Corona Cycleways’ Become the New Post-Confinement Commute

Hertz Proposes $1 Billion Stock Sale to Capitalize on Odd Rally

Amazon to Face Antitrust Charges From EU Over Treatment of Third-Party Sellers

Walmart, CVS, Walgreens to Stop Locking Up Black Beauty Products

Hello Kitty Gets a 31-Year-Old CEO

Ben Carlson: Some Things About the Markets That Will Never Change

Michael Batnick: How Often Do Stocks Fall?

Jeff Carter: The Corporate Route

Howard Lindzon: The Worst Risk/Reward In History?…and Why I Still Love Venture Capital

Joshua Brown: Ten Reasons The “Second Wave” Hasn’t Spooked The Markets (Yet) & Two Big L’s In A Row

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Dow -1,300
Posted by Eddy Elfenbein on June 11th, 2020 at 1:03 pm

The stock market is taking a hit today. Actually, it’s been a while since the bears had a good day so perhaps this was due. The Dow is currently down over 1,300 points. Of course, that’s a smaller percentage than it used to be. This may be the worst day since March.

This morning’s initial jobless claims report came in at 1.542 million. That’s the tenth weekly decline in a row. (By that, I mean decline in the increase.)

Many of the stocks that had been doing well, meaning stocks tied to an economic recovery, are down the most today. The “recovery thesis” is getting its first push-back in a few weeks.

This could be the market’s first three-day losing streak since March. That’s the longest run without one since 2017.