• Economic Updates
    Posted by on December 24th, 2018 at 10:27 am

    There are a few updates I wanted to pass along this morning. The first is that trading will close at 1 pm today. There’s no trading tomorrow.

    On Friday, the government gave the second update to Q3 GDP. The U.S. economy grew by 3.4% during the third quarter. Towards the end of January, we’ll get the first report on Q4. Wall Street expects something in the mid-2% range.

    Also on Friday, the government said that consumer spending rose by 0.4% in November while personal income rose by 0.2%. That tells me that Q4 looks pretty good.

    There was also an unusual story this weekend that President Trump was discussing firing Fed Chairman Jay Powell. I’m not a lawyer but my understanding is that that is legally ambiguous. I know many presidents have thought about it, but none have tried.

    More importantly, I don’t think firing Powell would make a big difference. The last rate increase was approved unanimously. Also, President Trump nominated Powell to the Fed chair last year. It would seem odd to want to get rid of him so soon.

    (Technical note. There are two nominations. One is to the Fed Board which Powell had already been a member of. The nomination as Fed chair is separate. So even if Trump could fire Powell as Fed chair, he could still remain on the Fed board.)

    On Friday, the S&P 500 closed at 2,416.58. That’s the lowest close for the index since July 6, 2017. In the last 13 trading sessions, the index has plunged 13.4%.

  • Morning News: December 24, 2018
    Posted by on December 24th, 2018 at 7:41 am

    OPEC in a ‘Whatever It Takes’ Moment to Prop Up Oil Prices

    China Cuts Tariffs on More Than 700 Goods Amid Open-Trade Drive

    Here’s Why Closing the Government Actually Costs Taxpayers Money

    Stock Market Rout Has Trump Fixated on Fed Chair Powell

    Trump-Powell Battle Would Span Three Arenas Where Everyone Loses

    Treasury Department’s Odd Attempt to Reassure Investors May Have Just Backfired

    Bottleneck at Printers Has Derailed Some Holiday Book Sales

    The Hit To Berkshire Hathaway’s Book Value And The Implications For Buffett’s Buybacks

    Forget Facebook, Amazon.com Is a Better Tech Stock

    South Korea to File Complaint Against BMW for ‘Delayed’ Response to Engine Fires

    DealBook Special: The Year on Wall Street

    How Credit Cards Are Used to Finance Mass Shootings

    Nick Maggiulli: Expectation vs. Reality

    Howard Lindzon: Momentum Monday – Ample Liquidity?

    Jeff Miller: Weighing the Week Ahead: What is Your Course for Uncharted Waters?

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  • CWS Market Review – December 21, 2018
    Posted by on December 21st, 2018 at 7:08 am

    “How did you go bankrupt?”
    “Two ways. Gradually, then suddenly.”
    ― Ernest Hemingway, The Sun Also Rises

    After nine-and-a-half years, one of the longest bull markets in history is on life-support. What started out as minor downturn has, since December, turned into a major sell-off. Ever since President Trump referred to himself as “Tariff Man,” the Dow has plunged nearly 3,000 points.

    Of course, no downturn has a single cause, and the Federal Reserve’s fingerprints are clearly visible. This week, the Fed raised interest rates yet again, and it sees more hikes coming next year. The market reacted swiftly and negatively.

    The numbers are remarkable. On Thursday, the S&P 500 closed at its lowest level in 15 months. In the last 12 trading sessions, the S&P 500 has lost 11.6%. The details are even uglier. Within the index, 423 stocks are now trading below their 200-day moving average. On Thursday, new lows beat new highs 175-0.

    Never fear. In this week’s issue, I’ll walk you through the mess and explain what to do now. I’ll also fill you in on the recent earnings report from FactSet, which looked pretty good to me even though the stock pulled back. But first, let me remind you that I’m going to send you the 2019 Buy List this Tuesday on Christmas Day. This will be our 14th annual Buy List. I like to unveil the new Buy List a few days before the new year, just to prove to folks that I don’t play any games as far as timing goes.

    As always, the new Buy List will have 25 stocks. I’m going to add five new names and I’ll delete five old ones. For tracking purposes, all 25 stocks are equally weighted based on the closing price from 2018. Then on January 2, the first day of trading for the new year, the new Buy List goes into effect. I’ll follow up with complete performance details. Now let’s get to this week’s unpleasantness.

    The Fed Raises Rates and the Market Raises Hell

    The Federal Reserve met again this week, and for the fourth time this year, the central bank raised interest rates. The target for the Fed funds rate is now 2.25% to 2.50%. As I’ve said before, I think raising rates now is a mistake. It’s true, the economy is getting better, but I still haven’t seen the normal pressures that signal an overheating economy.

    The facts are pretty straightforward. Inflation is low. The dollar is strong. The Canadian dollar just hit a new low. Commodity prices are down. The price of crude just fell to a 15-month low. Housing is having a tough year, and some markets are struggling. But for some reason, the Federal Reserve has been determined to raise interest rates. Some folks speculate that they’re trying to prove their independence from a critical White House. Perhaps.

    But what really spooked the market is the Fed’s apparent plans for even more hikes next year. The Fed’s policy statement noted that, “the labor market has continued to strengthen and that economic activity has been rising at a strong rate.” The statement also said that “some further gradual increases” are needed. In other words, they ain’t done.

    Along with the policy statement, the Fed released its economic projections for the next few years. The Fed members see two more increases next year. I think that’s way off base. In fact, if I were a Fed member (a big if), I would be leaning towards zero hikes for the next six months. Let workers see more gains. That’s more revenue for business.

    The Fed is actually moving in the right direction. The forecast from September called for three hikes next year. One member was on record calling for five hikes! So while the Fed is moving in the right direction, they still have a lot more room to go. I like to look at the futures market to see what the serious money thinks, and they don’t see any rate hikes coming next year. (To be precise, it’s almost 50-50 on one hike next December.) In fact, the futures think there’s a very, very slight chance of a rate cut sometime next year.

    Let me explain why I’m so concerned about rising interest rates from a stock-market perspective. Short-term interest rates are largely determined by the Fed. That, in turn, impacts long-term rates. That, in turn, influences stock valuations. If bond yields fall, then P/E Ratios can go higher. But if yields rise, then P/E Ratios will drop. The relationship is hardly perfect, but it’s good enough for our purposes.

    Here’s a chart showing the 10-year Treasury yield in red along with the yield on the S&P 500 in blue. In this example, I’m using dividends instead of earnings, but the same principle holds. Notice how the lines were fairly close to each other in 2015, 2016 and 2017, but a big gap opened up this year. Now the market is adjusting.

    Right now, earnings, the E in P/E Ratio, are growing quite nicely. However, rising yields are forcing the P/E Ratio down. The S&P 500 is currently going for about 14 times next year’s earnings. That’s not expensive. A year ago, Moody’s Baa Bond Index was yielding 4.2%. That’s up to 5.0% today. As a result, prices have shifted according to the new competition.

    If someone can get 5% from a fairly generic corporate bond, why should he or she bother with stocks? As a result, the price of stocks has gone down to entice investors back. So what’s happening is that the market is shifting towards a more defensive posture. In simple terms, conservative stuff like bonds and defensive stocks are holding up well, while cyclical stocks (Industrials, Energy, Banks) are suffering.

    How much longer will this last? Beats me, but I will say that selloffs usually end before anyone realizes it. Since its closing high three months ago, the S&P 500 has lost 15.8%. Traditionally, a 20% drop is considered a bear market. We may get there soon. In the short-term, the key for us to watch is the 200-day moving average. Whenever we’re below the 200-DMA, as we are now (by more than 10%), you know that the seas will be rough. Expect more volatility. We’ll get jerked higher and lower a lot, but once we clear the 200-DMA, things will get a lot calmer.

    What to Do Now

    The first and most important thing to do is not panic. In fact, that’s so important that I’ll make it the first and the second thing to do. Remember Warren Buffett’s dictum: “Be fearful when others are greedy. Be greedy when others are fearful.” Right now, there’s a lot of fear. I don’t advocate greed, but I do support disciplined buying.

    I also don’t want you to concern yourself about waiting for the absolute bottom. In retrospect, people think of “the low” as a big event that…happens. In reality, no one realizes it at the time, and it usually happens a lot faster than you think. You can be sure there will still be people predicting the next big leg down.

    In 2008, a major low came on November 20. Although this wasn’t the absolute low, it was a good time to buy. At the time, people were massively freaked out. The VIX was at 80. That’s crazy, but the prices were good.

    Right now, investors should focus on high-quality stocks going for discounted prices. Let me touch on a few Buy List names that look particularly good thanks to the selloff. The first is Cognizant Technology Solutions (CTSH). The stock just hit a new 52-week low. The company expects earnings this year of at least $4.50 per share. At this price, that gives them a trailing P/E Ratio of less than 14. I also really like Ross Stores (ROST) below $78 per share. Torchmark (TMK) below $74 is a very compelling buy. TMK may be the most conservative stock on our Buy List. The final one I want to highlight is FactSet, which reported earnings last week.

    FactSet Beat Earnings but the Shares Dropped

    On Tuesday morning, we got our final Buy List earnings report of 2018. FactSet (FDS), reported fiscal Q1 earnings of $2.35 per share. That was a 15.2% increase over last year. It also beat Wall Street’s estimate by six cents per share. Quarterly organic revenue rose 6.4% to $353.1 million.

    I’ve looked at the numbers, and they’re pretty good. The key stat for FactSet is Annual Subscription Value, or ASV. At the end of the quarter, ASV increased to $1.42 billion. I was pleased to see that FactSet’s operating margin rose to 28.6%.

    “We are pleased with our first-quarter results and are encouraged by continued demand for our data and technology offerings. Our strategy to provide open and flexible solutions positions us well for another successful year of growth,” said Phil Snow, FactSet CEO.

    At the end of the quarter, FactSet’s client count stood at nearly 5,300, while user count is now over 115,000. Their annual retention rate is over 95%. People love their service.

    When the Q4 earnings report came out three months ago, FactSet gave us guidance for 2019. This week, they reiterated all those projections. The company sees 2019 earnings ranging between $9.45 and $9.65 per share. That’s up from $8.53 per share last year. FactSet also sees organic ASV rising by $75 million to $90 million in 2019, and they see operating margins between 31.5% and 32.5%. That’s quite good.

    The market wasn’t pleased with FactSet’s results. The shares fell 4.2% on Tuesday and another 3.5% on Wednesday. Despite the drop, I don’t see anything wrong with the earnings report. FactSet continues to be an excellent company. Now it has a cheaper share price. If you can buy FDS near $200 per share, then you got a good deal.

    Buy List Updates

    Due to the recent downturn, several of our Buy List stocks are well below their Buy Below prices. For the time being, I’m going to take a light-handed approach to our Buy Below levels because it won’t mean much until the new Buy List goes into effect in January.

    This week, Japan Post said that it will buy a $2.4 billion stake in AFLAC (AFL). I touched on this in last week’s issue, but it became a done deal this week. Japan Post now owns 7% of the duck stock.

    According to the deal, after four years, Japan Post’s stake will rise to 20% of voting rights without buying any more shares. Once they hit 20%, Japan Post can record AFLAC’s profits as their own. AFLAC has held up relatively well for us recently. I remain a fan.

    This week Danaher (DHR) offered its first earnings guidance for 2019. The company sees 2019 earnings ranging between $4.75 and $4.85 per share on revenue growth of 4%.

    Thomas P. Joyce, Jr., President and Chief Executive Officer, stated, “We are very pleased with our 2018 performance year-to-date. We delivered strong revenue growth and operating-margin expansion, double-digit earnings per share growth and closed over $2B in acquisitions including IDT, a leading player in the genomics consumables market. We believe this year’s solid cash flow performance — in addition to our exceptional balance-sheet capacity — positions us very well for future strategic capital deployment.”

    Joyce continued, “We have transformed Danaher meaningfully over the past several years, evolving into a higher-growth, higher-margin, and higher-recurring-revenue company. We have done this through a combination of organic and inorganic growth initiatives, which have helped drive market-share gains in many of our businesses. Looking ahead, with the power of the Danaher Business System as our foundation we will continue to focus on building a better, stronger Danaher and creating shareholder value for years to come.”

    We don’t have the final numbers yet for 2018, but Danaher expects 2018 to be between $4.49 and $4.52 per share. Since only one quarter is missing, that’s probably pretty accurate.

    That’s all for now. The stock market will close at 1 p.m. ET on Monday and then be closed all day on Tuesday, Christmas Day. There’s not much expected in the way of economic news. On Thursday, we’ll get jobless claims, housing starts and consumer confidence. Then on Friday, the home-sales report is due out. Be sure to keep checking the blog for daily updates. Stay tuned for the 2019 Buy List on Tuesday, and I want to wish everyone a Merry Christmas.

    – Eddy

  • Morning News: December 21, 2018
    Posted by on December 21st, 2018 at 6:59 am

    Japan Inc Exit From Nuclear Exports Would Leave Field to Russia, China

    Oil Demand Flashes Red, Sending Crude Prices Even Lower

    When Market Ills Make the Economy Sick

    Investors Are in Retreat, and the Poorest Countries Are Paying for It

    China Pledges More Stimulus in 2019 as Economy Seeks Floor

    The Fed Just Marched Ahead with an Interest-Rate Hike — Here’s What the Increase Means for Your Wallet

    Hemp Is Officially Going Legal Nationwide

    Altria’s Juul Stake Is the Least It Could Do

    Kudos To Tilray And To AB InBev: This Partnership Is Win-Win

    Walgreens to Shed $1 Billion in Annual Costs

    Tesla Survived Manufacturing Hell; Now Comes The Hard Part

    Carlos Ghosn Rearrested on Suspicion of Shifting Personal Losses to Nissan

    Ben Carlson: A History of Fed Rate Hikes

    Michael Batnick: Surveying the Damage

    Jeff Carter: An Independent Fed

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  • Another New Low Today
    Posted by on December 20th, 2018 at 1:45 pm

    Stocks keep dropping lower. The market did not like what the Fed had to say. At its low, the S&P 500 got to 2,461.49 today. Wow.

    Looking at the 10-day intra-day chart, you can see how the Fed wrecked an already poor trend.

  • Morning News: December 20, 2018
    Posted by on December 20th, 2018 at 7:06 am

    Global Trade Tensions Boil Over at Staid W.T.O. Forum

    Trump Tariff War with China Sends U.S. Retailers on Buying Binge

    Powell to Markets: Take That

    Under New Leadership, the C.F.P.B. Lives On

    Hedge Fund Pain Compounded as Surprise Tax Hit Awaits Investors

    Wall Street Is Making the Most Money Ever. So Why the Long Face?

    Johnson & Johnson Loses Bid to Overturn a $4.7 Billion Baby Powder Verdict

    Juul May Get Billions in Deal With One of World’s Largest Tobacco Companies

    Micron Just Lowered The Bar

    How Much Trust Can Facebook Afford to Lose?

    Tilray and Budweiser Maker Will Partner to Research Weed Drinks; Tilray Stock Jumps

    FedEx CEO Blames ‘Bad Political Choices’ for the Glum Economic View

    Joshua Brown: Well, that could have gone better… & Unforced Errors

    Roger Nusbaum: Rough Market & An Awful Sentiment & FIRE Fights Back

    Blue Harbinger: Stock Exchange: Is Technical Damage Driving The Market Lower?

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  • Here are the Blue Dots
    Posted by on December 19th, 2018 at 2:08 pm

    Here are the latest economic projections:

    Fed members see two more hikes coming next year, another one in 2020 and none in 2021. I still think that’s overly aggressive.

    Going by weighted average, in September, the Fed expected 3.2 rate hikes next year. Now they expect 1.9 hikes. The correct answer is zero or maybe one.

    This is a bit closer to reality, but they have more room to go.

  • Today’s Policy Statement
    Posted by on December 19th, 2018 at 2:00 pm

    The Fed raised rates. The new target for Fed funds is 2.25% to 2.5%.

    Information received since the Federal Open Market Committee met in November indicates that the labor market has continued to strengthen and that economic activity has been rising at a strong rate. Job gains have been strong, on average, in recent months, and the unemployment rate has remained low. Household spending has continued to grow strongly, while growth of business fixed investment has moderated from its rapid pace earlier in the year. On a 12-month basis, both overall inflation and inflation for items other than food and energy remain near 2 percent. Indicators of longer-term inflation expectations are little changed, on balance.

    Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee judges that some further gradual increases in the target range for the federal funds rate will be consistent with sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective over the medium term. The Committee judges that risks to the economic outlook are roughly balanced, but will continue to monitor global economic and financial developments and assess their implications for the economic outlook.

    In view of realized and expected labor market conditions and inflation, the Committee decided to raise the target range for the federal funds rate to 2-1/4 to 2‑1/2 percent.

    In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its maximum employment objective and its symmetric 2 percent inflation objective. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.

    Voting for the FOMC monetary policy action were: Jerome H. Powell, Chairman; John C. Williams, Vice Chairman; Thomas I. Barkin; Raphael W. Bostic; Michelle W. Bowman; Lael Brainard; Richard H. Clarida; Mary C. Daly; Loretta J. Mester; and Randal K. Quarles.

  • Morning News: December 19, 2018
    Posted by on December 19th, 2018 at 7:14 am

    Oil Prices Plummet 7% on Fears of a Glut

    Fed Expected To Raise Rates Despite Trump Attacks

    The Year in Money

    My Goal Isn’t to Buy the Low, but to Buy a Positive Trend

    Here’s Who Bought Back the Most Stock in Q3 (Hint: It’s Not Apple)

    Pfizer, Glaxo to Create Over-the-Counter Drug Giant

    ‘It’s Been a Rout’: Apple’s iPhones Fall Flat in World’s Largest Untapped Market

    Masa? There’s an Angry Mrs. Watanabe on the Line

    FedEx Starts Buyout Program as Express Struggles

    An $8 Billion Credit Shop Found Success in America’s Heartland

    BP Launches $3 Billion Sale of U.S. Onshore Assets to Fund BHP Deal

    Huawei’s ‘Wolf Culture’ Helped It Grow, and Got It Into Trouble

    Nick Maggiulli: Expectation vs. Reality

    Cullen Roche: Let’s Talk About QE and Assflation

    Jeff Carter: NYC Tech

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  • Market Return By Unemployment Rate
    Posted by on December 18th, 2018 at 3:14 pm

    I ran a quick test this afternoon. I took all the monthly unemployment rate figures since 1948 along with the S&P 500’s monthly return. I then sorted them by unemployment.

    Here’s the S&P 500’s annualized price return by unemployment rate since 1948:

    Under 4%: +4.71%
    4% to 6%: +7.83%
    6% to 8%: +18.09%
    Over 8%: +22.17%

    By count, there were 115 months when the unemployment rate was below 4%, 432 months between 4% and 6%, 221 months between 6% and 8%, and 83 months when it was above 8%.

    I don’t think you can build a timing strategy here, but it probably confirms Warren Buffett’s dictum, “Be fearful when others are greedy and greedy when others are fearful.”