Retail Sales Rose Last Month
Posted by Eddy Elfenbein on June 14th, 2019 at 11:02 am

This morning’s retail sales report indicated that sales were up last month. Also, the numbers for April were revised higher.

The Commerce Department said on Friday retail sales rose 0.5% last month as households bought more motor vehicles and a variety of other goods. Data for April was revised up to show retail sales gaining 0.3%, instead of dropping 0.2% as previously reported.

Economists polled by Reuters had forecast retail sales climbing 0.6% in May. Compared to May last year, retail sales increased 3.2%.

Excluding automobiles, gasoline, building materials and food services, retail sales advanced 0.5% last month after an upwardly revised 0.4% rise in April. These so-called core retail sales correspond most closely with the consumer spending component of gross domestic product.

More evidence that the Fed doesn’t need to cut.

CWS Market Review – June 14, 2019
Posted by Eddy Elfenbein on June 14th, 2019 at 7:08 am

“People calculate too much and think too little.” – Charlie Munger

The big news this week came on Sunday night when Raytheon and United Technologies announced a merger agreement. This is exciting news, but the details aren’t so encouraging. I’ll discuss what I mean in a bit.

We also have a big Federal Reserve meeting coming next week. Wall Street expects the Fed to ride to the rescue once again. I’m not so sure. I’ll preview what to expect.

The stock market has already rallied back pretty impressively. The S&P 500 closed Thursday at its highest point in five weeks. Several of our stocks are at or near new 52-week highs.

Remember last year when Sherwin-Williams dropped 23% in a little over a month? Anything related to housing got smashed up. I’m glad we held on. This week, the stock made a new high. Sherwin is outpacing the market again this year.

Before we get to that, let’s look at the merger news between Raytheon and United Technologies.

Raytheon and United Technologies Are Merging

On Sunday afternoon, the financial media reported that Raytheon (RTN) and United Technologies (UTX) were in advanced merger talks. Shortly afterward, the news became official. The two defense giants are getting married. The deal is all stock.

On the surface, it’s a great fit. United Technologies is a Dow component and an outstanding company. Raytheon, of course, is a proud member of our Buy List. The new company will be called Raytheon Technologies. The companies said the merger will cut costs by $500 million which would save the Pentagon (and taxpayers) a bundle.

There are some important details. UTX is undergoing a major strategic overhaul. The company recently bought Rockwell Collins. They now plan to be strictly a defense company. In November, UTX announced plans to spin off two of its divisions: Otis Elevator and Carrier.

Those deals will be done before the Raytheon deal. As such, RTN shareholders won’t get any shares in those two companies. According to the merger deal, RTN shareholders will get 2.3348 shares of the new company for every one they own now.

OK, that sounds great, but 2.3348 shares of what? There’s no precise way to know what that’s worth until Otis and Carrier are spun off. It’s like saying to a new homebuyer, “Congratulations on your new home! By the way, what you bought isn’t exactly what you see. Your house will be missing a few rooms.”

The deal says that Raytheon shareholders will own 43% of the new company while UTX shareholders will own the other 57%. But that still doesn’t answer the question: how much are we being offered?

At one point, Raytheon was up 8% in Monday’s pre-market trading. The stock gapped up at the open, but it gradually slid back during the trading day. Then on Tuesday, RTN fell nearly $10 per share. That’s not encouraging.

As merger premiums go, this was a flop. To be fair, President Trump made some critical comments about the deal which probably weighed on the shares. The president has a valid point about industry consolidation. In the 1980s, there were 60 major defense contractors. Today, there are five.

Twenty years ago, the Pentagon blocked a merger deal between Lockheed Martin and Northrup Grumman. I’m not sure if that could happen anymore. From an anti-trust standpoint, the current deal doesn’t have much to worry about. The two businesses don’t overlap very much.

The companies said that the deal could bring an extra $20 billion to investors as a result of dividends and share buybacks, but some United Technologies shareholders aren’t pleased. Famed investor Bill Ackman sent a letter expressing his disapproval.

Raytheon and UTX understand they’re in a difficult spot. They have to compete against companies like Boeing which makes tons of money off its commercial business. As a result, they can be a very competitive bidder on military contracts. That puts a squeeze on profit margins which creates a need to cut costs. As a result, there’s incentive to merge. This won’t be the last big deal you’ll see in this sector.

I’m not against a merger deal, but I would have liked to see a better offer. I think Raytheon is undervalued as it is, and it appears that UTX isn’t offering us any sort of premium. I should note that Raytheon has an enviable balance sheet. That’s important because defense/aerospace is a capital-intensive business, meaning you gotta spend a lot to make a lot.

The other issue for RTN shareholders is that their stock is basically stuck until the deal is finalized. I would expect RTN to track UTX closely for the next several months. As per the rules of the Buy List, RTN will remain a member of the Buy List for the rest of this year.

My take: I like the idea of a merger. UTX is a great partner. I think some merger deal was inevitable, but I don’t like the price. In fact, I’m not sure what the price is. But going by the market’s reaction, Raytheon should be getting more. I hope to hear more details soon. Raytheon remains a buy up to $190 per share.

Next Week’s Fed Meeting

The Federal Reserve gets together again next week. This is one of the meetings where the central bank revises its economic forecasts.

Lately, Wall Street has been asking for (demanding) interest-rate cuts in order to help out the stock market. I don’t think the Fed will play ball.

For one, the economic data isn’t that bad. The recent jobs report was a little light, but the unemployment rate is still just 3.6%. That’s close to a 50-year low. This week’s CPI report showed that consumer inflation is basically right in the Fed’s target zone.

The latest data from the futures market show that investors think there’s a 31.7% chance that the Fed will cut next week. I don’t see a cut happening. Central bankers are cautious folks. I agree with the decision a few months ago to hold off on the planned rate hikes, but jumping in and cutting rates right now is something very different.

For the July FOMC meeting, the futures market thinks there’s a 90% chance the Fed will cut. That really surprises me. Traders think the Fed will cut again in September and a third time in December.

To give you an idea of how much things have changed, one month ago, traders saw a 9% chance of two rate cuts by September. Now the odds are 76%. The yield on the two-year Treasury, which is a good proxy for Fed policy, just dropped to its lowest yield in 18 months.

I think Wall Street has gotten ahead of itself. Next week’s meeting will include the Fed’s updated forecast for interest rates. I expect to see a cautious approach from the Fed. I also think Chairman Powell may try to talk down expectations in his press conference. Wall Street could be surprised by the Fed’s unwillingness to help them out.

Wall Street’s temper tantrum really got going after a pair of President Trump’s tweets in early May threatened to ratchet up the trade war. However, there’s a big G20 meeting at the end of this month. I think there’s a good chance the president will announce some sort of breakthrough. That could take the pressure off the market. I don’t think the Fed wants to see itself as Wall Street’s servant.

Buy List Updates

Shares of Disney (DIS) got a nice boost this week after an analyst at Morgan Stanley raised his price target from $135 to $160 per share. I’m lifting my Buy Below on Disney to $150 per share.

Two weeks ago, Ross Stores (ROST) released another solid earnings report. As per tradition, the deep discounter offered pessimistic guidance. For Q2, Ross sees earnings of $1.05 to $1.11 per share. The cautious guidance held me from raising my Buy Below price. It shouldn’t have, however, so I’ll do it this week. Ross Stores is a buy up to $106 per share.

This week, I’m also going to drop the Buy Below on Signature Bank (SBNY) to $127 per share. That could be a good sign. It seems like every time I cut my Buy Below on SBNY, it starts to rally.

That’s all for now. The Federal Reserve meets next week on Tuesday and Wednesday. The policy statement is due out on Wednesday at 2 p.m. ET. On Tuesday, we’ll get the latest report on housing starts. The jobless-claims report is due out on Thursday. On Friday, the report on existing-home sales is released. 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 14, 2019
Posted by Eddy Elfenbein on June 14th, 2019 at 7:04 am

As Trade War Hits, China Factories See Slowest Growth Since 2002

How Tanker Attacks in the Strait of Hormuz Could Affect Oil Prices

Boeing’s Decision on New Jet Is Critical in Rivalry With Airbus

Facebook’s New Cryptocurrency, Libra, Gets Big Backers

PetSmart’s Chewy Gets Wall Street Tails Wagging with $1 Billion IPO

Broadcom Falls After Cutting Its Chip Sales Guidance: 6 Key Takeaways

Who Are You Calling Chicken? Tyson Foods is Getting into the Business of Plant-Based Meat

Does Amazon Really Pay No Taxes? Here’s the Complicated Answer

Manhattan’s Newest Flagship Department Stores Are Ignoring the Retail Apocalypse

Stanford Team Aims at Alexa and Siri With a Privacy-Minded Alternative

Volkswagen to Float 10% of Truck Unit, Seeks to Raise 1.9 Billion Euros

Hey, Raptors Fans, You Want Fries With Those 3-Pointers?

Roger Nusbaum: Putting a Price Tag on Happiness

Jeff Miller: Do You Evaluate Your Trading Mistakes?

Ben Carlson: David Swensen & a Target Date Fund Walk Into a Bar

Be sure to follow me on Twitter.

Morning News: June 13, 2019
Posted by Eddy Elfenbein on June 13th, 2019 at 7:56 am

Oil Surges as Tankers in Gulf Suffer Another Suspected Attack

Is Bitcoin Growing Up? Regulated Futures Boom as Investors Seek a Safer Ride

Hong Kong’s Financial Elite Grow Uneasy as China Tensions Rise

The Fed Needs to Be the Adult in the Economy

As Trade War With U.S. Grinds On, Chinese Tourists Stay Away

Social Security Is Staring at Its First Real Shortfall in Decades. Big Cuts Could Follow.

Alibaba Files for a Hong Kong Mega-Listing

Huawei Files to Trademark Mobile OS Around the World After U.S. Ban

Mitsubishi Envisions More Comfortable Regional Flights on its New ‘SpaceJet’

Here’s What FedEx’s Breakup With Amazon Means

Investors Pumped Billions Into Suburbs That Never Got Built

Store’s Bid to Shame Customers Over Plastic Bags Backfires

Petrobras Ignored Warnings About Fuel Broker Implicated in Graft Probe

Joshua Brown: The Big Kickoff & A 2% Tax on America’s 75,000 Wealthiest Families Would Raise $2.75 Trillion

Michael Batnick: More Art Than Science, Dad Cat Bounce & Operational Momentum

Be sure to follow me on Twitter.

Another Tame Inflation Report
Posted by Eddy Elfenbein on June 12th, 2019 at 12:55 pm

The CPI report came out this morning and it was another tame report. For May, consumer prices rose just 0.1%. That matched Wall Street’s expectations. That’s after a 0.3% rise in April. In the last year, consumer prices are up 1.9%.

The core rate, which excludes food and energy, was also up 0.1%. In the last year, the core rate is up 2.0%.

Gasoline prices fell 0.5% in May after rising 5.7% in April. Food prices rebounded 0.3% in May after dipping 0.1% in the prior month. Food consumed at home increased 0.3% last month.

Owners’ equivalent rent of primary residence, which is what a homeowner would pay to rent or receive from renting a home, increased 0.3% in May after rising 0.3% in April.

Healthcare costs increased 0.3%, matching April’s rise. The solid increase in healthcare costs at both the consumer and production levels last month suggests a pickup in the core PCE price index in May.

The cost of hospital services increased 0.5% in May and the cost of doctor visits ticked up 0.1%. But the prices for prescription medication fell 0.2%.

Apparel prices were unchanged in May after tumbling 0.8% in the prior month. They had declined for two months in a row after the government introduced a new method and data to calculate apparel prices.

Prices for used motor vehicles and trucks tumbled 1.4%. That was the largest drop since last September and marked the fourth straight monthly decrease. The cost of motor vehicle insurance fell 0.4%, the most since May 2007. There were also decreases in the cost of recreation.

But prices for airline tickets, household furnishings and new vehicles rose last month. Household furnishings are likely to trend higher in the coming months because of U.S. President Donald Trump’s decision in early May to slap additional tariffs of up to 25% on $200 billion of Chinese goods.

Here’s the real Fed funds rate based on core inflation.

Morning News: June 12, 2019
Posted by Eddy Elfenbein on June 12th, 2019 at 7:13 am

Hong Kong Markets Roiled by Interbank Rate Squeeze Amid Protests

Iran Scrambles to Lift Petrochemical Sales as Sanctions Hammer Oil

Ten U.S. States Sue to Stop Sprint-T-Mobile Deal, Saying Consumers Will Be Hurt

House Opens Tech Antitrust Inquiry With Look at Threat to News Media

Dassault to Buy Medidata in $5.7 Billion Health Data Push

Highlights from Tesla’s Annual Meeting

Your iPhone Is Already Made in America

Facebook’s New Study App Pays Adults for Data After Teen Scandal

Grubhub Stock Gets a Boost on Amazon’s Exit From Food Delivery

GE’s Larry Culp Faces Ultimate CEO Test in Trying to Save a Once-Great Company

A Krispy Kreme in Times Square Will Have Stadium-Style Seats and a Glaze Waterfall

Kraft Introduces ‘Salad Frosting’ to Help Trick Your Kids Into Eating More Vegetables

Nick Maggiulli: Being Wrong When You Get It Right

Cullen Roche: Three Charts I Think I’m Thinking About

Jeff Carter: If You Immigrate, You Can’t Bank

Be sure to follow me on Twitter.

Morning News: June 11, 2019
Posted by Eddy Elfenbein on June 11th, 2019 at 7:18 am

U.S. Job Openings Outnumber Unemployed by Widest Gap Ever

Trump Says Mexico Tariffs Worked, Emboldening Trade Fight With China

China Says Will Respond if U.S. Escalates Trade Tension

Chinese Tech Giant Huawei Hints That U.S. Pressure Is Hurting Sales

Top Japanese Chip Gear Firm to Honor U.S. Blacklist of Chinese Firms

Apple’s U.S. iPhones Can All Be Made Outside of China If Needed

Expedia Is Undervalued In A Recession Resistant Industry

Salesforce Dreams of Being Microsoft or Oracle

Amazon: Impact Of Increasing Rivalry With FedEx

Nissan and Renault Lock Horns as Relationship Sours Further

Deutsche Bank Tax Probe Targets About 80 Current, Former Staff

Howard Lindzon: Momentum Monday – We Don’t Need No Stinking Tariffs

Ben Carlson: Managing Money vs. Managing Wealth & Talk Your Book: The Net Lease REIT ETF

Joshua Brown: Get Used To It & Trump on the Fed: They’re Disruptive

Be sure to follow me on Twitter.

CNBC’s Interview with Raytheon’s and UT’s CEOs
Posted by Eddy Elfenbein on June 10th, 2019 at 12:06 pm

Watch CNBC’s full interview with the CEOs of United Technologies and Raytheon from CNBC.

Trump Is Concerned about the Raytheon Deal
Posted by Eddy Elfenbein on June 10th, 2019 at 12:02 pm

From CNBC:

President Donald Trump on Monday said he has concerns that a merger between United Technologies and Raytheon would harm competition and make it more difficult for the U.S. government to negotiate defense contracts.

“I’m a little concerned about United Technologies and Raytheon,” Trump said in an exclusive interview with CNBC. Aerospace companies have “all merged in so it’s hard to negotiate” with them, he added, suggesting the defense industry could be heading in the same direction.

Asked whether he would have problems with the merger, Trump replied, “Only if they have the same products. That would be the thing that bothers me most.”

(…)

“We are complementary, not competitive,” Raytheon CEO Tom Kennedy told CNBC in an interview. “I don’t know the last time we competed against United Technologies.”

Greg Hayes, United Technologies’ CEO and chairman who is slated to be CEO of the new company, once the merger closes, said he looked forward “to talking to the president later today,” about potential job growth under the deal.

Still, the president repeatedly expressed concerns about dwindling competition in aerospace.

“When I hear United and I hear Raytheon, when I hear they’re merging, does that make it less competitive? It’s already not competitive,” Trump said.

“I just want to see competition. They’re two great companies, I love them both. But I want to see that we don’t hurt our competition.”

Morning News: June 10, 2019
Posted by Eddy Elfenbein on June 10th, 2019 at 7:07 am

U.K. Economy Shrinks as Factory Output Falls Most Since 2002

Argentina’s Economic Misery Could Bring Populism Back to the Country

China Summons Tech Giants to Warn Against Cooperating With Trump Ban

Mnuchin Dashes Investor Dreams of Quick Fannie-Freddie Windfall

Wall Street Asks When, Not if, the Fed Will Cut Interest Rates

United Technologies, Raytheon to Combine as Defense Giant

Some Big Tech Firms Cut Employees’ Access to Huawei, Muddying 5G Rollout

A Billboard No. 1 Is at Stake, So Here’s an Album With Your Taylor Swift Hoodie

Renault Rift with Nissan Widens Over Governance, Casts Shadow on Alliance

Employees Sour on Tesla Amid Cost-Cutting, Layoffs

3 Reasons to Retire as Early as You Can

‘Trade of Our Lives’: After Mueller, UBS Banker Faces Questions

Michael Batnick: Talk Your Book: The Net Lease REIT & Ackshually…

Jeff Carter: Network Effects and Venture Capital & SEC and Kik

Jeff Miller: Weighing the Week Ahead: Should Investors Bank on the Fed?

Be sure to follow me on Twitter.