Morning News: August 21, 2019
Posted by Eddy Elfenbein on August 21st, 2019 at 7:02 am

Japan, U.S. Ministers Meet for Trade Talks as Hopes for Early Deal Fade

How Central Banks, Governments Are Fighting Global Slowdown

The Upside-Down Economy: Some Banks Want the Rich to Pay to Deposit Money

Muni-Bond Buyers Are Desperate. Risky Borrowers Are Cashing In

Trump Says He Had to ‘Take China On,’ Regardless of Short-Term Impact on U.S. Economy

Trump Says He’s Exploring ‘Various Tax Reductions,’ and the Economic Data He Loves Shows Why

The Big Business of Scavenging in Postindustrial America

Amazon Opens Its Largest Campus Yet

Goldman Moves to Take Majority Control of China Joint Venture

Welcome to McDonald’s. Would You Like a Podcast With Those Fries?

The Collective Memory of American Shoppers

Citigroup, BNP Caught Up in U.S. Case Against Huawei CFO

Nick Maggiulli: The Red Queen of Investing

Howard Lindzon: The Business of Sleep

Jeff Carter: The Recession

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Morning News: August 20, 2019
Posted by Eddy Elfenbein on August 20th, 2019 at 7:27 am

Wall Street Poised to Get Long-Sought Changes to Volcker Limits

Huawei Founder Sees ‘Live or Die Moment’ From U.S. Uncertainty

How Shareholder Democracy Failed the People

Banks Want Efficiency. Critics Warn of Backsliding.

Facebook and Twitter Say China Is Spreading Disinformation in Hong Kong

Humbled Deutsche Bank Faces Battle in Its Own Backyard

Climate Change Could Rain on Saudi Aramco’s IPO Parade

Apple’s Highly Profitable Meal

U.S. Yield Curve: Invert, Steepen, Repeat

Elanco to Become No.2 in Animal Health with $7.6 Billion Bayer Deal

The Sports News Site Haters Love to Dunk on Keeps Signing Up Subscribers

Why Luxury Fashion Is Walking the Runway in Recycled-Plastic Heels

Michael Batnick: “Make It Stop”

Ben Carlson: Talk Your Book: Invest Like a Hedge Fund With Titan

Roger Nusbaum: The Greatest Thing I Have Ever Seen!

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Was Disney Inflating Revenue?
Posted by Eddy Elfenbein on August 19th, 2019 at 4:16 pm

I don’t know the details, but this story just broke (from MarketWatch):

Disney whistleblower told SEC the company inflated revenue for years

The whistleblower was fired as a Walt Disney Co. accountant in 2017

A former Walt Disney Co. accountant says she has filed a series of whistleblower tips with the Securities and Exchange Commission alleging the company has materially overstated revenue for years.

Sandra Kuba, formerly a senior financial analyst in Disney’s revenue-operations department who worked for the company for 18 years, alleges that employees working in the parks-and-resorts business segment systematically overstated revenue by billions of dollars by exploiting weaknesses in the company’s accounting software.

Kuba said she has met with officials from the SEC on several occasions to discuss the allegations.

A spokeswoman for the SEC declined to comment.

A Disney spokesperson said the company had reviewed the whistleblower’s claims and found that they were “utterly without merit.”

Kuba’s whistleblower filings, which have been reviewed by MarketWatch, outline several ways employees allegedly boosted revenue, including recording fictitious revenue for complimentary golf rounds or for free guest promotions. Another alleged action Kuba described in her SEC filing involved recording revenue for $500 gift cards at their face value even when guests paid a discounted rate of $395.

Kuba has also alleged that employees sometimes recorded revenue twice for gift cards, both when guests bought the gift card and when it was used at a resort. Sometimes, revenue was recorded even though a gift card was given to a guest for free following a customer complaint, for instance, according to the whistleblower’s allegations.

Kuba’s filing alleges that flaws in the accounting software made the manipulation difficult to trace, though the consequences could be significant. In just one financial year, 2008-09, Disney’s annual revenue could have been overstated by as much as $6 billion, Kuba’s whistleblower filing alleges. The parks-and-resorts business segment reported total revenue of $10.6 billion in 2009, according to its annual report filed with the SEC.

Kuba told MarketWatch she first reported the alleged revenue-recognition issues to management in 2013. She said that no one responded to her at that time. She said that she escalated her concerns to a more senior executive in 2016 and that Disney’s corporate audit group contacted her once in November 2016 but never followed up.

Kuba said she brought her concerns to the SEC in August 2017. She was fired from Disney about a month later.

In October 2017, Kuba filed a whistleblower-retaliation complaint with the Department of Labor’s Occupational Safety and Health Administration. Disney’s response to the department’s whistleblower office investigator’s inquiry said that Kuba’s employment was terminated because “she displayed a pattern of workplace complaints against co-workers without a reasonable basis for doing so, in a manner that was inappropriate, disruptive and in bad faith.”

Kuba has made two additional whistleblower filings since leaving the firm, including one this past June. The most recent tip alleges some Disney employees reclassified guest revenue from high-sales-tax items such as hotel rooms to lower-taxed items such as food and beverages with the purpose of significantly reducing sales tax liabilities in Florida, California and Hawaii. MarketWatch has reviewed the three filings and supporting documentation that was sent to the SEC.

The Disney spokesperson said: “The claims presented to us by this former employee — who was terminated for cause in 2017 — have been thoroughly reviewed by the company and found to be utterly without merit; in fact, in 2018 she withdrew the claim she had filed challenging her termination. We’re not going to dignify her unsubstantiated assertions with further comment.”

Kuba said she has withdrawn her claim challenging her termination but reserves the right to resubmit it and continues to dispute Disney’s decision to fire her.

The whistleblower said she has talked with officials from the SEC by phone and met with them in person on more than one occasion, including as recently as last week, to discuss the allegations in her filings. The SEC has also requested additional documentation related to the allegations, based on correspondence reviewed by MarketWatch.

The pattern of interaction with the SEC suggests the regulator is taking the allegations seriously, said Jordan A. Thomas, a former attorney in the SEC’s enforcement division and chairman of Labaton Sucharow’s whistleblower-representation practice. As Thomas told MarketWatch: “The SEC receives more than 25,000 tips, complaints and referrals each year, and the vast majority do not make it this far. The fact that the SEC has asked for more information more than once and conducted interviews suggests an inquiry is underway.”

These charges should be taken seriously but there seems to be reason for doubt.

Morning News: August 19, 2019
Posted by Eddy Elfenbein on August 19th, 2019 at 7:13 am

China Pressures Business Over Hong Kong. Workers Get Caught in the Middle.

Trump Says U.S. Is Talking With China But Not Ready for a Deal

Apple CEO Warns Trump About China Tariffs, Samsung Competition

A Year of Stock Market Fury, Signifying Nearly Nothing

How the Recession of 2020 Could Happen

Powell Likely to Use Jackson Hole to Suggest Fed Ready to Cut

Stimulus Optimism Boosts Stocks, Eases Pressure on Bonds

Business Roundtable’s New Philosophy: It’s Not All About Shareholders

Fearing Data Privacy Issues, Google Cuts Some Android Phone Data for Wireless Carriers

Novartis CEO Battles Fallout From Data Manipulation

How Aggressively Cute Toys for Adults Became a $686 Million Business

Jeff Miller: Is the Yield Curve Inversion on the Jackson Hole Agenda?

Ben Carlson: Who Has the Most Impressive Investment Track Record?

Jeff Carter: Growth Vs Maintenance & If You Are Drowning And Someone Throws You A Life Line-Take It

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CWS Market Review – August 16, 2019
Posted by Eddy Elfenbein on August 16th, 2019 at 7:08 am

“Don’t gamble; take all your savings and buy some good stock and hold it till it goes up, then sell it. If it don’t go up, don’t buy it.” – Will Rogers

What had been a fairly quiet summer on Wall Street has gotten rather more dramatic recently. On August 5, the Dow plunged 767 points. That was followed by a plunge of 800 points on August 14.

In percentage terms, of course, those drops are barely a scratch, but it’s jarring, especially when compared with the calm market we’ve had. We also had the news this week that the yield curve finally inverted. Specifically, the yield on two-year Treasuries exceeded that of ten-year Treasuries. This event caused a Category 1 freakout among market commenters. I’m surprised FEMA wasn’t called in. The yield curve even got a presidential tweet (in all caps).

This is an odd market. Investors have been gobbling up bonds at a frenetic pace. This week, the yield on the 30-year Treasury dropped to an all-time low, and the Federal Reserve looks to cut rates again. There’s renewed talk that a recession is just around the bend.

First let me say: don’t worry. In this week’s CWS Market Review, I’ll walk you through the mysterious territory of Wall Street and let you know what you should be doing. By the way, our Buy List has been zipping past the market nearly every day recently. We’re on our way to beating the market again this year. But first, let’s look at the great yield curve inversion of 2019.

What an Inverted Yield Curve Means for Us

On Wednesday, the yield curve finally inverted. What does that mean? In plain language, the yield on the two-year Treasury was above that of the ten-year Treasury.

Gotcha, but what does that mean?

In still plainer talk, investors aren’t being paid to take on more risk. Lending your money to Uncle Sam for two years pays you the same as lending for ten. You’re not getting anything for taking on the risk of eight more years. Well, if people aren’t being paid to take on risk, guess what: they won’t.

Not taking on risk is not a good thing for the economy. That’s the why the 2/10 Spread has a pretty good track record of predicting recessions. It’s not so much the inversion that’s bad; it’s what it means. By the way, there are lots of ways to measure the yield curve. The 2/10 is just one, but it’s the one in the news.

I want to stress a few notes of caution. Let’s look at the world of economic stats.

Lagging indicators: sure, we got plenty of those.

Coincident indicators: eh, a few.

Leading indicators: not much.

The 2/10 is one. As the saying goes, it’s hard to make predictions, especially about the future.

With the 2/10, we gain a rare example of a forward indicator with a decent track record, but it comes at the expense of timing. Simply put, the world doesn’t automatically explode once the 2/10 gets inverted. It’s more of a dimmer switch than a toggle.

The key is that the 2/10 isn’t bad news itself. The world of finance loves to fetishize numbers. Instead, we should focus on what those numbers represent. An inverted 2/10 spread is basically like all the fire trucks being down at Arby’s having lunch. When trouble does come—and it will—the response will be more difficult.

In December 1988, the 2/10 inverted more than 18 months ahead of the recession. In May 1998, the 2/10 briefly inverted. It fought that off, but it became inverted again in February 2000. The recession began a year later.

During the last recession, the 2/10 spread first inverted in December 2005, but the recession didn’t begin for another two years.

Still, that track record beats a lot of humans. Remember that all metrics have downsides. That’s not a reason to dismiss them. It means we have to be aware of the limitations of our analytical tools.

The bottom line is that the yield curve inversion is a big deal, but it’s no reason to run for the exits. The Federal Reserve will probably lower rates next month, and perhaps a few more times after that. That could revert the curve. In fact, a 0.5% cut isn’t out of the question.

The Two-Tiered U.S. Economy

I also have to mention that we’re at an interesting juncture for the economy. The U.S. economy is currently moving at two different speeds. The consumer part of the economy is doing well. Folks are out there buying stuff. The last retail-sales report was quite good, and Walmart had a very encouraging earnings report. (It’s funny, but the Walmart earnings report is de facto a report on American consumer spending.)

However, the industrial part of the economy is feeling winded. This week’s industrial-production report wasn’t so hot. A lot of cyclical stocks haven’t done much (like RPM or Continental Building Products). People ask me if the market is going to sag, but in reality, a lot of the stock market has been in correction mode for several months. Energy stocks in particular have been dead. There are four key cyclical sectors: Financials, Energy, Materials and Industrials. All four have been weak lately.

We may also be at the limits of what monetary policy can do for the economy. Granted, I’m being more speculative here. Jay Powell and his friends can lower rates. That’s not hard. But it doesn’t mean that banks will start making loans. The demand part is the problem. The situation is far more advanced in Europe where interest rates are negative. A bank in Denmark just launched the world’s first negative interest rate mortgage. The bank will pay borrowers 0.5% to buy a home. This is a new world.

It seems odd that the U.S. would want to follow Germany and Japan down the maze they’ve been trapped in. There’s $15 trillion worth of negative-rate bonds in the world at the moment. We could be in a vicious cycle of low rates not creating demand, which is creating still-lower rates.

One key bright spot for the economy is the housing market. It’s steadily expanding. As long as that’s happening, the odds of a recession are very low. Next week, we’ll get the latest reports on new- and existing-home sales. That’s probably as important as the yield curve.

For now, investors should continue to focus on high-quality stocks. You may have noticed that on days when the market gets nervous, our Buy List stocks tend to do much better. Our Buy List has beaten the S&P 500 14 times in the last 16 days. The only hitch is that it means we’ve lost less. Over that time, the S&P 500 has lost 5.69% while we’re down just 1.38%. For the year, we’re beating the S&P 500 19.87% to 13.59% (not including dividends).

I want to highlight a few Buy List stocks that look particularly good at the moment. I like where Raytheon (RTN) is right now. My Buy Below is currently $195 per share, but if you can get RTN below $180, that’s a good deal. Check Point Software (CHKP) also looks quite good. Any buy below $110 is a smart move. Lastly, there’s Eagle Bancorp (EGBN). I’ll warn you that EGBN is more speculative, but that’s how the game is played. Of course, the legal issues are a problem, but if all goes well, then this bank is going for a nice bargain.

Now let’s look at some upcoming earnings reports.

Earnings Preview for Ross Stores and Hormel Foods

Now that Q2 earnings season is behind us, we have the earnings reports for Buy List stocks with quarters that ended in July. There are only three stocks like that. Ross Stores and Hormel Foods are due to report earnings next Thursday, August 22. JM Smucker reports the following Tuesday, August 22. I’ll preview the jelly folks next week. Let’s now look at the first two.

Ross Stores (ROST) continues to be one of my favorite retailers, and they’re doing quite well in the Age of Amazon. Three months ago, the deep-discounter reported fiscal Q1 earnings of $1.15 per share. Those numbers were quite good. For context, Ross told us to expect earnings between $1.05 and $1.11 per share. As usual, Ross is pretty conservative with its guidance.

The CEO noted that ladies’ apparel has been somewhat weak. Ross is also facing higher transportation costs. All of that puts a squeeze on operating margins. For any business that caters to bargain-conscious shoppers, that can be a big problem. For now, Ross seems to be handling it well.

For Q2, Ross sees comparable-store sales growth of 1% to 2%. For EPS, the company sees the exact same as Q1: $1.05 to $1.11 per share. Ross now sees full-year earnings of $4.38 to $4.52 per share. That includes seven cents per share thanks to a favorable tax benefit. The old range was $4.30 to $4.52 per share. Adjusting for that, in effect, ROST’s guidance range narrowed thanks to a one-cent increase at the low end and a five-cent decrease at the high end.

Let’s remember that Ross took a swan dive late last year. The shares fell from $103 to $76 in just a few weeks. It was scary, but I’m glad we held on. The stock gradually made its way back. On Tuesday of this week, Ross got briefly got above $108 per share. Look for another good report from Ross Stores next Thursday.

Hormel Foods (HRL) has been one of our laggards this year. Through Thursday, shares of HRL are down 3% on the year. Despite the sluggish performance, I can’t say that HRL has been a big disappointment.

Three months ago, Hormel beat by a penny. The problem is that they lowered their full-year guidance. Hormel now sees sales of $9.5 billion to $10 billion. The previous guidance was $9.7 billion to $10.2 billion. They also lowered their EPS guidance to $1.71 – $1.85. The previous range was $1.77 to $1.91 per share.

Jim Snee, Hormel’s CEO, said that despite record sales, last quarter did not meet their expectations: “African swine fever in China started to impact global hog and pork markets this quarter, which led to rapidly increasing input costs. In response, we have announced pricing action across our branded value-added portfolio in the Grocery Products, Refrigerated Foods and International segments.”
Snee said that the lower guidance “is based on the input cost increases experienced in the second quarter and a forecast for volatile domestic pork prices in the second half of fiscal 2019.”

Hormel’s outlook is troubling, but I’m still confident the company can manage its way through short-term issues. Wall Street is looking for earnings of 37 cents per share.

Before I go, there’s one more important item. Torchmark has changed its name to Globe Life (GL). The new ticker symbol is GL. Nothing else changes, and the share price and Buy Below are the exact same.

That’s all for now. There’s not a whole lot in the way of economic news next week, but I’ll be keeping an eye out for a few things. On Wednesday, the Federal Reserve will release the minutes of their last meeting. This is when they decided to cut interest rates. Also on Wednesday, we’ll get the report on sales of existing homes. Then on Friday, the report for sales of new homes comes out. For the most part, the housing sector is expanding. 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 16, 2019
Posted by Eddy Elfenbein on August 16th, 2019 at 7:04 am

Trump Says China Talks ‘Productive’; Beijing Vows Tariff Retaliation

China Ramps Up Brazil Soybean Imports, Rebuffing U.S. Crops

Saudi Arabia is Dramatically Changing Its Oil Exports to China and the US

‘Crazy Inverted Yield Curve’ Vexes Fed, With No Clear Resolution

Businesses Flock to Baltimore Wasteland in Epic Turnaround Tale

Cathay CEO Quits After Airline Caught in Hong Kong Protests

GE Rout Ambushes Hedge Funds After Second-Quarter Buying Spree

Boeing Delays Launch Of Long-Haul Jet As 737 Max Crisis Remains The Focus

WeWork Stands Before Us in All Its Naked Glory

U.S. Surfboard Makers Not So Stoked About China Tariffs

Momofuku’s Secret Sauce: A 30-Year-Old C.E.O.

Wells Fargo Closed Their Accounts, but the Fees Continued to Mount

Cullen Roche: Let’s Get Inverted

Lawrence Hamtil: Compendium of Posts on Investing in Emerging Markets

Joshua Brown: Murdoch Has Seen Enough, ”Economic Buffoonery”, How Young Investors Should Think About Yield Curves and Recessions & Is the Yield Curve Coming to Kill You?

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Morning News: August 15, 2019
Posted by Eddy Elfenbein on August 15th, 2019 at 7:04 am

Markets Are Shaken by New Signs of Global Economic Trouble

Here’s Why the German Economy is Tanking and Most Likely Headed for Recession

China Signals Imminent Retaliation Against New U.S. Tariffs

Hong Kong Adds $2.4 Billion in Stimulus as Protests Hit Economy

India Shut Down Kashmir’s Internet Access. Now, ‘We Cannot Do Anything.’

U.S. Seeks to Block Release of Seized Oil Ship in Gibraltar

Trump Delays a Holiday Tax, but Toymakers Are Still Worried

Markets Register a Shock, But is Trump Right to Blame the Fed?

Boeing Delays Delivery of Ultra-Long-Range Version of 777X

WeWork IPO Shows It’s the Most Magical Unicorn

Macy’s Needs No Help to Fall Flat on Its Face

Facebook Just Gave 1.3 Billion Messenger Users A Reason To Delete Their Accounts

Michael Batnick: The Game Has Changed & It’s Hard to Think Long-Term

Animal Spirits: Business in a Box

Jeff MIller: Stock Exchange: The Beginning Or End Of The Sell Off?

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Talking with Tobias
Posted by Eddy Elfenbein on August 14th, 2019 at 7:00 pm

Tobias Carlisle was kind enough to invite me on his podcast. I had a lot of fun chatting about the market and all things investing.

The 2/10 Spread Inverts
Posted by Eddy Elfenbein on August 14th, 2019 at 10:54 am

For the first time in more than a decade, the yield on two-year Treasuries is greater than the yield on ten-year Treasuries. As someone who has written a lot about the 2/10 Spread, it’s odd to see it in the headlines today. It even made Drudge.

I also find myself in the unusual spot of telling people to relax a bit. A 2/10 inversion is not a good thing, but it’s not exactly a tripwire. Historically, inversions precede recessions by as long as two years. We had an inversion in the late 1990s when the economy was doing very well.

What it means is that people are getting paid to take on more risk. As a result, people won’t take on more risk. That can be bad for the market since it lives off the backs of risk-takers.

People are also concerned about the stock market falling. But the stock market has been falling, just quietly. Going back to early 2018, many sectors of the market haven’t done that well. Finance, Energy, Materials have all done poorly. It just didn’t get a lot of attention. The “high beta” sector is in a technical correction. The 30-year Treasury is at a record low.

Morning News: August 14, 2019
Posted by Eddy Elfenbein on August 14th, 2019 at 7:06 am

Yield Curves Invert in U.S., U.K. as `Doom and Gloom’ Spreads

German Economic Reversal Piles Pressure on Merkel for Stimulus

Resilient East EU Shows Slumping West That Stimulus Can Work

China’s Economy Worsens in July, Industrial Growth at 17-year Low as Trade War Escalates

Lower Fees, Snazzy Branches: Hong Kong Banks Gird for Online-Only Onslaught

U.S. Delays Some China Tariffs Until Stores Stock Up for Holidays

Trump 2020 Rust Belt Pitch Threatened by Manufacturing Recession

FTC Chief Says He’s Willing to Break Up Big Tech Companies

CBS, Viacom Reunite with Plans for Bigger Role in Streaming TV Wars

The Rise of the Virtual Restaurant

The USDA Dropped a Corn Bombshell. What It Means for Deere and Other Stocks.

It’s Hot. It’s August. It’s … Pumpkin Spice Time?

Nick Maggiulli: The Seduction of Above Average

Ben Carlson: The Impact of Interest Rates & Inflation on Stock Market Valuations

Jeff Carter: Small Investors on The Capitalization Table

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