Jobless Claims = 1.877 million
Posted by Eddy Elfenbein on June 4th, 2020 at 11:20 am

Today’s jobless claims report came in at 1.877 million. That’s another decline, our ninth in a row, but it was worse than expectations.

Economists surveyed by Dow Jones had been looking for 1.775 million new claims. The Labor Department’s total nevertheless represented a decline from the previous week’s upwardly revised total of 2.126 million. Filings under the Pandemic Unemployment Assistance program totaled 623,073.

This was the first time the government’s weekly jobless claims report came under 2 million since the week ended March 14.

“Even as states reopen, claims in the millions are an indicator that the economic pain of the COVID-19 crisis is still acute,” said Daniel Zhao, senior economist at job placement site Glassdoor.

Tomorrow is the big May jobs report.

Yesterday, the S&P 500 rose for the fourth day in a row and the seventh time in the last eight sessions. As I write this, the index is up by a tiny bit.

Morning News: June 4, 2020
Posted by Eddy Elfenbein on June 4th, 2020 at 7:05 am

Rally Pauses Ahead of ECB Stimulus Plan

Germany Finally Splurges, But Not Without Fresh Criticism

China Steps Back in Airline Dispute With the Trump Administration

Senate Approves More Time to Spend Paycheck Protection Loans

U.S. Jobless Claims Understate Reality With Gaps in Federal Data

America’s Safety Net Is Failing Its Workers

401(k) Plans Move a Step Closer to Pooling With Private Equity

Vanguard’s Eight-Year Quest to Crack $1 Trillion Market Drags On

GM Plans Electric Van for Business Users In Bid to Pre-Empt Tesla

GM CEO Mary Barra Expects North American Plants to Return to Near Pre-Coronavirus Levels By Late June

AMC Theatres Has ‘Substantial Doubt’ It Can Reopen

Former U.A.W. President Gary Jones Pleads Guilty

Ben Carlson: Animal Spirits: The Unluckiest Generation

Joshua Brown: Troy Prince Introduces Wall Street To Talent They Haven’t Discovered Yet

Howard Lindzon: ‘If You Had Told Me’ … and Fashology Takes Flight

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S&P 500 Is Over 3,100
Posted by Eddy Elfenbein on June 3rd, 2020 at 11:20 am

This morning’s ADP payroll report showed that the U.S. economy shed 2.76 million jobs last month. As bad as that is, it’s much better than expectations.

The stock market is up again today. The S&P 500 broke through 3,100. The index is up for the fourth day in a row and the seventh time in the last eight sessions.

Sherwin-Williams (SHW) made a new high today and FactSet (FDS) is very close to a new high.

Morning News: June 3, 2020
Posted by Eddy Elfenbein on June 3rd, 2020 at 7:06 am

Oil Prices Hit 3-Month Highs On Expectations OPEC+ Will Extend Deepest-Ever Production Cuts

Huawei Hid Business Operation in Iran After Reuters Reported Links to CFO

Trump Administration Escalates Global Fight Over Taxing Tech

Major Employers Left Out of Government’s Coronavirus Relief Plan

A Decade’s Worth of Progress for Working Women Evaporated Overnight

Google Faces $5 Billion Lawsuit In U.S. For Tracking ‘Private’ Internet Use

Zuckerberg Defends Hands-Off Approach to Trump’s Posts

Mukesh Ambani Won the World’s Most Expensive Sibling Rivalry

Tiffany Stock Plunges 9% After Report That LVMH Deal Could Fall Through

The Other Fossils in the Boardroom

Howard Lindzon: Panic With Friends – Jenny Lefcourt of Freestyle VC Joins Me To Talk Entrepreneurship and Investing

Nick Maggiulli: How Big is the Racial Wealth Gap?

Ben Carlson: Why We Don’t Learn From History

Joshua Brown: On the Link Between Economic Inequality and Social Injustice

Jeff Carter: Shame

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+38% From the Low
Posted by Eddy Elfenbein on June 2nd, 2020 at 4:28 pm

The stock market closed at another new high, although our Buy List trailed the market. Energy stocks had a very good day, and since we don’t own any energy, that hurt our relative strength. The Buy List may soon be positive for the year. We’re not far away.

Stocks tied to the reopening of states outperformed once again. Citigroup, Wells Fargo and Bank of America all rose at least 0.9%. Gap climbed 7.7%. Southwest gained 2.6%.

“This is a healthy reversion as you’re seeing some of the laggards come back in line,” said Jeff Kilburg, CEO of KKM Financial. “If anything, this is going to help sustain a more bullish stance in the marketplace.”

Tomorrow, we get the ADP payroll report. Then on Thursday, there’s another jobless claims report. Of course, Friday is the big jobs report for May.

Morning News: June 2, 2020
Posted by Eddy Elfenbein on June 2nd, 2020 at 7:03 am

China Buys U.S. Soybeans After Halt To U.S. Purchases Ordered

Oil Prices Rise Before OPEC+ Meeting About Extending Output Cuts

Global Shares Cruise To Three-Month Highs, Dollar Shows The Strain

A Tug-of-War Between Bulls and Bears Is Muddling Risk Indicators

Sell, Stow Or Dump? Retailers Wrestle With Mountain Of Unsold Stock

JPMorgan’s Math Shows Why U.S. Stocks Can Keep Rallying

Retailers, Battered by Pandemic, Now Confront Protests

Black Workers, Already Lagging, Face Big Economic Risks

KKR Spends Big and Fast to Avoid Mistakes of 2008 Crisis

IRS Fails to Pursue Thousands of Rich Tax Cheats, Watchdog Says

Volkswagen Closes $2.6 Billion Investment In Self-Driving Startup Argo AI

BlackRock Is Biggest Beneficiary of Fed Purchases of Corporate Bond ETFs

Embraer Seeks Business Partners But Not A Repeat of the Boeing Deal

Joshua Brown: “This is simple and straightforward, unless you are committed to misunderstanding it.”

Howard Lindzon: Momentum Monday – Rioting, Looting and Froth

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A Two-Month High for the S&P 500
Posted by Eddy Elfenbein on June 1st, 2020 at 3:54 pm

The stock market is up again today. This comes after a painful weekend of protests across the country.

This is the first business day of the month and that’s usually when the ISM Manufacturing report comes out. I like this report because the lag time is fairly low. This morning’s report came in at 43.1. That’s actually not so terrible, though it’s not good.

U.S. manufacturing activity eased off an 11-year low in May, the strongest sign yet that the worst of the economic downturn was behind as businesses reopen, though the recovery from the Covid-19 crisis could take years because of high unemployment.

The Institute for Supply Management (ISM) said on Monday its index of national factory activity rose to a reading of 43.1 last month from 41.5 in April, which was the lowest level since April 2009. A reading below 50 indicates contraction in manufacturing, which accounts for 11% of the U.S. economy.

Economists polled by Reuters had forecast the index rising to 43.0 in May.

This morning’s construction spending report showed a decline of 2.9%. That’s also bad but not as bad as it could have been. It’s the lowest number since October 2018.

The S&P 500 looks to close today at a two-month high.

Morning News: June 1, 2020
Posted by Eddy Elfenbein on June 1st, 2020 at 7:04 am

Poor Countries Face a Debt Crisis ‘Unlike Anything We Have Seen’

‘Lemon’ Or Not, Trump Is Stuck With Phase 1 China Trade Deal

China Halts Some U.S. Farm Imports, Threatening Trade Deal

In Hong Kong, China Threatens Businesses and Workers

Wall Street and Fed Fly Blind As Coronavirus Upends Annual Stress Tests

Rich World’s Jobs Crisis Jolts Money Flows To Millions

Goldman Rolls Back Its Pessimistic Outlook for American Stocks

Banks Have a Mountain of Deposits So They Don’t Need PPP Funding

Record Ratings and Record Chaos on Cable News

Nestlé Loses Fight With Impossible Over Meatless Burger Branding

IBM, the Silent Job Cutter, Stokes Worker Anxiety, Speculation

Fall Is Now Jam-Packed for Book Publishers. That Could Be A Problem.

Ben Carlson: Winners & Losers from the Work From Home Trend & Why Bad is Stronger Than Good (There is No Opposite of Trauma)

Roger Nusbaum: Interesting Volatility Fund

Jeff Miller: Are We There Yet?

Howard Lindzon: Scott Belsky (Chief Product Officer of Adobe) Joins Me On ‘Panic With Friends’

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U.S. Savings Rate Soars to 33%
Posted by Eddy Elfenbein on May 29th, 2020 at 10:54 am

The day after the GDP report, we get reports on personal income and spending. This time was an odd one. For April, personal income rose by 10.5% while personal spending decreased by 13.6%. The lockdown has screwed with even boring economic stats. The savings rate soared to 33% as Americans are stockpiling cash.

The personal savings rate hit a historic 33% in April, the U.S. Bureau of Economic Analysis said Friday. This rate — how much people save as a percentage of their disposable income — is by far the highest since the department started tracking in the 1960s. April’s mark is up from 12.7% in March.

The swiftness and severity of a U.S. economic recovery hinges on whether consumers continue to stockpile cash or start to spend again.

“There is a tremendous uncertainty and virus fear that is lingering, and that is restraining people’s desire to go out and spend as they normally would,” said Gregory Daco, chief U.S. economist at Oxford Economics.

The previous record savings rate was 17.3% in May 1975, according to FactSet. The savings rate was elevated above 13% throughout most of the early 1970s. The increase in savings came as spending declined by a record 13.6% in April.

The stock market was doing well yesterday but dropped in the afternoon. The trend is continuing into today’s market. Traders could be nervous ahead of President Trump’s comments on China at today’s news conference.  

CWS Market Review – May 29, 2020
Posted by Eddy Elfenbein on May 29th, 2020 at 7:08 am

“I am not young enough to know everything.” – Oscar Wilde

Despite more terrible economic news, the stock market has continued to climb higher. On Tuesday, the S&P 500 topped 3,000 for the first time in nearly three months. During the trading day on Thursday, the index got as high at 3,068 before dropping off in the afternoon.

The S&P 500 also broke above its 200-day moving average (the blue line in the chart below), which is a key technical indicator for chart watchers. That’s often an omen for higher share prices in the future.

Importantly, we’re also seeing more stocks join in the party. A total of 95.4% of the stocks in the index are above their 50-day moving averages. That’s quite good. Ryan Detrick points out that in ten out of the last 11 times that that has happened, the market was higher a year later. The average gain was 16%.

The good news for stocks has come amid terrible news for the economy. The stock market isn’t merely “climbing a wall of worry.” It’s soaring on misery. On Thursday, we learned that another 2.1 million Americans filed for first-time jobless claims. Next Friday, we’ll get the jobs report for May, and it won’t be a pretty one.

In this week’s issue of CWS Market Review, I’ll update you on the latest for the economy and stock market. I’ll also cover the recent earnings reports from Ross Stores and Hormel Foods.

I’m pleased to see our stocks rally as well. Our Buy List is up 38% since the low from two months ago. Ten of our 25 stocks are up for the year. How about Trex? The deck stock has run a 33.2% gain so far this year. We also just got a new 52-week high from Sherwin-Williams. I’ll have more on our Buy List in a bit, but first, let’s look at the terrible economic news.

Climbing a Wall of Worry

On Thursday, we got a trio of lousy economic data. The jobless-claims report said that 2,123,000 Americans filed for jobless claims. That’s actually the eighth-straight improvement to that number in a row.

We also got the durable-goods report on Thursday. For the second-straight month, we saw a large drop. For April, durable goods fell by 17.2%. That’s on top of a 16.6% drop for March.

Lastly, the government revised the Q1 GDP growth report downward. The initial report had been for -4.8%. That was revised down to -5%.

In late July, we’ll get our first look at Q2 GDP, and it will be very bad. Merrill Lynch recently lowered its Q2 GDP estimates from -30% to -40%. Goldman expects -39%. The Atlanta Fed’s GDPNow expects -41.9%. That’s actually an improvement from earlier data.

I won’t hazard a guess at the Q2 number, but it will be bad. I hear from some folks who are puzzled by the market’s reaction. We should remember a few key facts. The first is that the market already plunged by 34%. It accurately foresaw the bad news we’re getting now. Perhaps the market is predicting a smoother recovery than we have reason to believe.

This year’s Q1 was the worst Q1 in the history of the S&P 500. Q2 is on pace for being the best Q2 in 82 years.

We should also remember that many companies are still making a profit. For the first quarter, the companies in the S&P 500 made about $20 per share. (That’s the index-adjusted figure. Every point in the index is worth about $8.3 billion.) At the start of the year, the expectation for Q1 had been for earnings of $40 per share, so the results were bad, but still profitable.

For Q2, Wall Street expects earnings of $23 per share. The consensus sees that rising to $31 for Q3 and to $36 for Q4. For 2021, analysts expect earnings of $162 per share. If that’s correct, it would be an all-time high. Let me add a major caveat that I’m skeptical of any data that far into the future. The point I want to make is that the main variable is how quickly we can get back to something approaching normal. If that happens in 18 months, then I think it’s reasonable that the market can safely look past the terrible numbers from this spring. This isn’t a normal market, so perhaps it doesn’t need normal analysis.

Not all the economic news has been terrible. Greg Ip had an interesting article in the Wall Street Journal highlighting some emerging signs of growth. For example, Uber said that rides have risen for three-straight weeks and that traffic is up 40% from the trough. Wendy’s said that same-store sales were down 2%. That’s an improvement from the low point of -26% a few weeks earlier. I also think we’ll see a shift away from goods made in China, particularly with regard to pharmaceuticals and technology.

What’s struck me lately is the components of the rally. I like to look at the S&P 500 High Beta Index divided by the S&P 500 Low Vol Index. This ratio is a quick way to read the market’s willingness to shoulder risk. That’s a key part in beginning and sustaining a recovery.

As one would expect, Low Vol crushed High Beta during the panic. Since the turnaround, High Beta has returned the favor and is beating on Low Vol. In fact, the ratio is basically back to where it was four months ago.

To me, this suggests the market sees a quicker and smoother recovery coming than is commonly believed. In particular, I’ve noticed the resurgence of stocks like Sherwin-Williams (SHW) and Middleby (MIDD).

I have to confess that I thought the rally that started on March 23 would be a short burst. I’m happy to have been proven wrong. I encourage investors to remain invested in a widely-diversified portfolio of high-quality stocks like you’ll find on our Buy List. Now let’s take a closer look at our recent earnings reports.

Earnings from Hormel Foods and Ross Stores

We had two earnings reports on May 21, from Hormel Foods and Ross Stores. These were for quarters ending in April.

Let’s start with Hormel Foods (HRL). The Spam folks reported for their fiscal Q2, and it was a tough quarter for them. Organic sales rose 6%, and EPS fell to 42 cents. The latter matched Wall Street’s consensus.

Like so many other companies, Hormel has withdrawn its guidance. For Q2, the company’s operating margin fell from 13.3% to 12.1%. That’s not a good sign.

Hormel said it absorbed about $20 million in “incremental supply-chain costs,” including employee bonuses and more cleaning expenses. Comparable-sales volumes increased by 7%.

Here’s the breakdown by segment:

Refrigerated Foods
Segment profit down 17%
Organic volume down 1%

Grocery Products
Segment profit up 22%
Organic volume up 19%

Jennie-O Turkey Store
Segment profit up 54%
Volume up 19%

International & Other
Organic volume down 1%
Segment profit up 62%

The CEO said, “even though the COVID-19 pandemic has caused a dramatic shift in consumer behavior, operational disruptions and extreme volatility in raw material markets, we remain financially strong and well-positioned to weather the pandemic.”

Hormel currently has over $600 million in cash on hand. The company is in a strong financial position with limited debt and consistent cash flows. Total debt is $315 million, up from $250 million at the beginning of the year.

The shares initially pulled back after the earnings report but have since moved higher. Hormel remains a good buy up to $48 per share.

Ross Stores (ROST) also released its earnings on May 21. Or rather, it would have reported earnings if the stores had been open. Instead, the company closed all of its stores, so Ross showed a big operating loss.

For the 13 weeks ending on May 2, Ross Stores lost 87 cents per share. That’s down from a profit of $1.13 per share one year ago. Ross also halted its dividend.

Total Q1 sales were $1.8 billion. That’s down from $3.8 billion for the same quarter one year ago. Q1 also includes a one-time charge of $313 million or 58 cents per share resulting from the extended period of store closures.

Ross’s Q1 guidance had been for $1.16 to $1.21 per share, but on March 19, they withdrew guidance. The company is a well-run outfit, and it’s prepared to ride out the storm. CEO Barbara Rentler said:

“In response to the economic disruption created by this global health crisis, we quickly took decisive actions to increase our liquidity and financial flexibility. These included drawing down $800 million under our revolving credit facility, completing a $2.0 billion public bond offering, suspending our stock-repurchase program, and aggressively cutting costs throughout the Company, including ongoing expenses and capital expenditures. Today we are announcing several additional actions, which include the suspension of our quarterly dividend program and reduced new-store openings for the year.”

Honestly, I’m not terribly concerned about Ross’s latest results. No one can make a profit when all their stores are shut. Still, I’m very confident that Ross will do well once the economy reopens.

On May 14, the deep-discounter began a phased reopening process. So far, approximately 700 stores have reopened. The stock has gained 17% in the last ten sessions. ROST remains a buy up to $100 per share.

Buy List Updates

There are a few of our Buy Below prices that I want to adjust this week.

Disney (DIS) said that Disney World will reopen on July 11. That’s very good news. Bear in mind, they’re not just flinging open the doors. Instead, it’s going to be a controlled process, and attendance will be capped. Epcot and Hollywood Studios will follow on July 15. I’m lifting my Buy Below on Disney to $125 per share.

FactSet (FDS) closed above $300 per share for the first time in three months. FactSet wraps up its fiscal Q3 at the end of May, and the company will report its earnings on June 25. Wall Street currently expects earnings of $2.43 per share. I’m lifting my Buy Below on FDS to $312 per share.

Like FactSet, RPM International (RPM) ends its quarter at the end of May. This is its fiscal Q4. Companies are allowed extra time to report their Q4 results, so RPM usually reports in late July. That places them in the middle of the regular earnings season. I like where this company is going. I’m hiking my Buy Below on RPM to $80 per share.

Trex (TREX) is turning into a home-run stock for us. On Monday, the deck-maker got as high as $132.84 per share during the trading day. We now have a 33.2% YTD gain in Trex. This week I’m raising our Buy Below on Trex to $128 per share.

Middleby (MIDD) may be our most dramatic stock this year. At one point, MIDD was a 60% loser for us. Since then, it’s rallied 60%. Despite that impressive turnaround, it’s still our biggest loser on the year. Don’t throw in the towel! Middleby remains a buy up to $72 per share.

That’s all for now. We’ll get many of the key turn-of-the-month economic reports next week. The ISM Manufacturing report is due out on Monday. The ADP payroll report comes out on Wednesday, along with the ISM Non-Manufacturing report. Thursday is yet another jobless-claims report. Then Friday is the biggie—the May jobs report. The last report showed a staggering loss of 20.5 million jobs. 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