Morning News: June 22, 2018
Posted by Eddy Elfenbein on June 22nd, 2018 at 7:05 am

Trade Tensions Are the Biggest Risk for the Euro Zone, the IMF Says

Oil Prices Rise as OPEC Meets

OPEC Meeting to Wrestle With Lingering Permian ‘Pandemonium’

Bank of Mexico Raises Overnight Rate to 7.75%

Big Banks Clear Fed’s Stress Test

Federal Judge Rules that Consumer Protection Bureau is Unconstitutional

How American Flight Attendants, Using Facebook, Changed Airline Policy On Separated Migrant Kids

Google Engineers Refused to Build Security Tool to Win Military Contracts

Red Hat Revenue, Profit Guidance Miss Expectations; Shares Tank

PayPal to Acquire Fraud Prevention Company Simility for $120 Million

One of the World’s Largest Commercial Real Estate Companies is Going Public

Chanel Opens Its Books for the First Time

Blue Harbinger: What Is Your Trading Personality?

Roger Nusbaum: The Pre & Early Retirement Anxiety Reducing ETF Portfolio

Ben Carlson: The Original Flash Crash (or Why Liquidity Fears Are Nothing New)

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Morning News: June 21, 2018
Posted by Eddy Elfenbein on June 21st, 2018 at 7:12 am

Central Bank Leaders Warn Trade Conflicts Could Damage Global Economy

Oil Prices Rise on Declining U.S. Supplies, Attacks on Libyan Ports

Argentina to Join Widely Watched Emerging Markets Index By MSCI

Nightmare on China’s Wall Street Part II

China Accuses U.S. of Trade ‘Abuses’ as India Hits Back at Trump

Trump Says Trade Wars Are ‘Easy.’ Here Come the First American Casualties.

21st Century Fox Agrees to Higher Offer From Disney

How A Reduction In Hospital Deaths Helped Amazon And Buffett Pick Atul Gawande

Micron Earnings Prove the Doubters Wrong Again

Xiaomi Starts Taking Orders for the World’s Biggest IPO for Two Years

Is There A Smarter Path to Artificial Intelligence? Some Experts Hope So

A CO2 Shortage is Causing a Beer and Meat Crisis in Britain

Michael Batnick: Animal Spirits: The Mother of All Credit Bubbles

Cullen Roche: The Fall of GE and the Rise of Indexing

Joshua Brown: Preparing Yourself Mentally for What’s to Come

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Sweet Nostalgia with Warren Buffett and Bill Gates
Posted by Eddy Elfenbein on June 20th, 2018 at 11:40 am

Morning News: June 20, 2018
Posted by Eddy Elfenbein on June 20th, 2018 at 7:05 am

Saudi Struggles For Gulf Oil Producers’ Support Ahead of OPEC Meeting

China Tells Farmers To Grow More Soybeans Amid Trade Fight With U.S.

Cryptocurrencies Fall as Korean Exchange Says $32 Million of Coins Stolen

U.S. Growth Is ‘Close to a Peak’, But Risks Are Mounting

Microsoft Employees Protest Work With ICE, as Tech Industry Mobilizes Over Immigration

GE Drops Out of the Dow After More Than a Century

Ford and Volkswagen Discuss Developing Vehicles Together

Amazon Urged Not to Sell Facial Recognition Technology to Police

PayPal Agrees to Buy Payments Firm Hyperwallet for $400 Million

AT&T in Talks to Acquire AppNexus for About $1.6 Billion

Can My Pension Lower My Social Security Benefits?

Commerce Secretary Shorted Stock as Negative Coverage Loomed

Nick Maggiulli: The Evil Hours

Jeff Carter: Where Is Alpha?

Ben Carlson: Too Big To Be Simple?

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GE Kicked Out Of The Dow
Posted by Eddy Elfenbein on June 19th, 2018 at 10:47 pm

Dow Jones announced this afternoon that General Electric (GE) is being removed from the Dow Jones Industrial Average for Walgreens Boots Alliance (WBA).

This isn’t completely unexpected. Here’s me three years ago:

I have to wonder how much longer GE will be in the Dow.

— Eddy Elfenbein (@EddyElfenbein) April 10, 2015

GE simply doesn’t make up much of the Dow. The stock closed today at $12.99. That means it makes up about 100 points in the Dow, which is currently at 24,700. The average Dow stock makes up over 800 points in the index.

GE has been a Dow member for over 110 years. On November 7, 1907, General Electric replaced Tennessee Coal, Iron and Railroad Company in the Dow. GE was an original Dow stock in 1896 but it was dropped in 1898, added back in 1899, then dropped again 1901 and added back in 1907.

I find it interesting that many dystopian movies feature powerful corporations (Pan-Am in 2001 or Atari in Blade Runner). In reality, these organizations come and go faster than you think.

The current Dow divisor is 0.14523396877348. That means every $1 in a Dow stock is about seven Dow points. The divisor will now be adjusted for WBA. Here’s the GE chart going back 56 years:

This Week’s Divergence
Posted by Eddy Elfenbein on June 19th, 2018 at 10:50 am

It’s still early, but this is an arresting chart:

This shows us that High Beta stocks are falling hard while the Low Volatility sector is barely scratched. This is a big divergence. It generally signals that investors are less willing to shoulder risk.

The gap opened on Friday but narrowed as the day wore on. Then it got bigger yesterday, and today it’s quite large.

Morning News: June 19, 2018
Posted by Eddy Elfenbein on June 19th, 2018 at 7:16 am

What Will OPEC Let Slip for Crude Oil?

5 Reasons The Drop In Gold Prices Shouldn’t Worry Investors

Wealthy Asians Are Getting Rich Faster Than Anyone Else

What Can Beijing Do If China-U.S. Trade Row Worsens?

Why Would the Fed Want to Raise the Unemployment Rate a Full Percentage Point?

Why Doesn’t Mr. Market Recognize The Iron Mountain Of Dividends?

Mercari Jumps 77% in Tokyo Debut After $1.2 Billion IPO

Fujifilm Sues Xerox for More Than $1 Billion After Canceled Merger

American Airlines Partner Expects More Flight Cancellations This Week

With Two Suitors for Fox, the Murdochs Consider Next Steps

U.S. Homes Are a Lot Cheaper Than They Look, Harvard Study Finds

Financial World’s A-List Could Take Hollywood’s Cue on Inclusion

Howard Lindzon: Momentum Monday – Emerging Flu?

Roger Nusbaum: 60/20/10/10?

Joshua Brown: Why You Work Is Becoming as Important as What You Do

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Morningstar on Ingredion
Posted by Eddy Elfenbein on June 18th, 2018 at 11:01 am

Ingredion (INGR) is a difficult company to describe. Morningstar does a pretty good job. If you’re a fan of INGR, I recommend giving this a read. There are so many good parts but here are some highlights:

Ingredion (INGR) manufactures starches and sweeteners by wet milling and processing corn and other starch-based raw materials. The company steeps these raw materials in a water-based solution before separating the starches from coproducts (animal feed and corn oil). The starches are then further processed into starch and sweetener ingredients used primarily by the food and beverage industries, as well as the paper, corrugating, brewing, and personal care industries.

The company classifies its products as either core or specialty ingredients, with core ingredients generating roughly 70% of companywide sales (as reported) and just below 50% of profits (based on our estimates). Core ingredients are typically commodity-grade, providing no pricing power for Ingredion. Ingredion sells roughly half of its core sales on a cost-plus basis. Specialty ingredients are value-added, requiring additional processing and, in many cases, proprietary formulations. They typically command twice the gross margins and enjoy twice the sales growth of core ingredients. Although we expect demand for Ingredion’s core ingredients to grow roughly in line with GDP in the regions where they are sold, specialty ingredient volume should grow in the mid- to high single digits.

(…)

The most appropriate lens through which to analyze Ingredion’s competitive advantage is our moat framework for commodity processors. Moaty businesses that operate in this space tend to benefit from switching costs, intangible assets, or cost advantage. For Ingredion, we see evidence of switching costs and intangible assets, but not cost advantage. Slightly more than 70% of companywide sales involve the processing of raw materials (corn, tapioca, potatoes, rice) purchased at market prices into commodity-grade starch and sweetener ingredients over which Ingredion commands no pricing power. We view this core ingredients business as having no moat. With roughly half of its sales priced on a cost-plus basis, the core ingredients business should generally deliver returns on invested capital in line with the company’s weighted average cost of capital.

We believe Ingredion’s specialty ingredients business operates with a narrow moat and earns excess ROICs. As a result, it has served as the key driver of the positive economic profit spread witnessed on a companywide basis each year over the past decade. The evidence for switching costs and intangible assets stems predominantly from Ingredion’s specialty ingredients business, which accounts for slightly less than 30% of Ingredion’s sales and just over half of its profits.

(…)

Given the scale of Ingredion’s commodity operations, the qualitative evidence for a companywide moat is arguable. However, the quantitative evidence is strong. Ingredion’s ROICs have consistently exceeded the company’s weighted average cost of capital in recent years. Based on our calculations, ROICs have averaged 11.5% over the trailing 10-year period, safely above our assumed 8.2% WACC. Due primarily to an improving product mix driving very modest margin expansion, our midcycle ROIC forecast sits slightly above 12%, and we feel confident that economic profits will persist at least 10 years into the future. Although corn prices, Ingredion’s key input cost, can fluctuate significantly, half of Ingredion’s core sales are priced on a cost-plus basis, which essentially locks in returns roughly in line with the company’s cost of capital. For the remaining half of core sales, the company’s active hedging strategy should help minimize ROIC volatility in the years to come. As evidence of the stability of its business, Ingredion generated positive economic profits during both the financial crisis and the North American corn drought of 2012.

Alliance Data Rebounds
Posted by Eddy Elfenbein on June 18th, 2018 at 10:30 am

Shares of Alliance Data Systems (ADS) got off to a terrible start this year. On January 12, ADS got as high as $278.33. By May 3, it was down to $193.87.

Since then, it’s recovered a lot of lost ground. This morning, ADS got up to $236.96. That’s a gain of 22% in a few weeks. The stock is still down for the year, but the rebound has been impressive. ADS is now above its 50- and 200-day moving averages.

Morning News: June 18, 2018
Posted by Eddy Elfenbein on June 18th, 2018 at 7:14 am

Brent Bounces on Muted Production- Increase Reports

Xi to Counter Trump Blow for Blow in Unwanted Trade War

U.S.-China Trade Standoff Weighs on Global Shares

Bitcoin Could Break the Internet, Central Bank Overseer Says

Is the Gig Economy a Myth?

Almost 1 Million People ‘Testing’ WhatsApp Payments Service In India

Google to Invest $550 Million in China E-Commerce Site JD

How AT&T Beat the Government

Time Warner Is Just What AT&T Needed to Take on Facebook and Google

Amazon Tightens Grip on a New Medium: Live Streams of Video Games

Unilever Demands Influencer Marketing Business Clean Up Its Act

Audi Chief Rupert Stadler Arrested in Diesel Emissions Probe

Roger Nusbaum: Financial Independence = FU Money

Ben Carlson: Why The Next Bear Market May Feel More Painful

Jeff Miller: What is Working, and Will It Persist?

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