Today’s Fed Policy Statement
Posted by Eddy Elfenbein on March 21st, 2018 at 2:01 pm

The Fed raised rates by 0.25%. The new range for Fed funds is 1.50% to 1.75%.

Information received since the Federal Open Market Committee met in January indicates that the labor market has continued to strengthen and that economic activity has been rising at a moderate rate. Job gains have been strong in recent months, and the unemployment rate has stayed low. Recent data suggest that growth rates of household spending and business fixed investment have moderated from their strong fourth-quarter readings. On a 12-month basis, both overall inflation and inflation for items other than food and energy have continued to run below 2 percent. Market-based measures of inflation compensation have increased in recent months but remain low; survey-based measures 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 economic outlook has strengthened in recent months. The Committee expects that, with further gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace in the medium term and labor market conditions will remain strong. Inflation on a 12-month basis is expected to move up in coming months and to stabilize around the Committee’s 2 percent objective over the medium term. Near-term risks to the economic outlook appear roughly balanced, but the Committee is monitoring inflation developments closely.

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 1-1/2 to 1-3/4 percent. The stance of monetary policy remains accommodative, thereby supporting strong labor market conditions and a sustained return to 2 percent inflation.

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 objectives of maximum employment and 2 percent inflation. 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. The Committee will carefully monitor actual and expected inflation developments relative to its symmetric inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant further gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.

Voting for the FOMC monetary policy action were Jerome H. Powell, Chairman; William C. Dudley, Vice Chairman; Thomas I. Barkin; Raphael W. Bostic; Lael Brainard; Loretta J. Mester; Randal K. Quarles; and John C. Williams

Here are the new economic projections.

For the rest of this year, six FOMC members see two more hikes while another six see three more hikes. Two members see no increases while one sees four more increases this year.

The median Fed voter sees two more hikes this year, plus another three next year, plus two more in 2020.

Bad Day for Packaged Goods
Posted by Eddy Elfenbein on March 21st, 2018 at 12:53 pm

General Mills (GIS) is getting clocked today thanks to a lousy earnings report. GIS is the worst performing stock today in the entire S&P 500.

The problem for us is that this is bringing down two of our stocks, Hormel Foods (HRL) and Smucker (SJM). Wall Street assumes that if one company in a sector is having problems, then they all must be. SJM is currently down 4.3% while HRL is off by 2.3%.

Both companies are still doing well. A few weeks ago, Hormel met earnings and raised both their guidance and their dividend. That was their 52nd annual dividend increase. Smucker beat earnings and raised guidance.

Morning News: March 21, 2018
Posted by Eddy Elfenbein on March 21st, 2018 at 7:05 am

China Newspaper Calls for Curbs Against U.S. Soybean ‘Dumping’

Fed Set to Raise Rates, Issue New Economic Projections

How Trump’s Protectionism Backfires

Facebook’s Lax Data Policies Led to Cambridge Analytica Crisis

The End for Facebook’s Security Evangelist

We Fear What We Can’t Control About Uber and Facebook

Amazon is Now Second Most Valuable U.S.-Listed Company, Tops Alphabet

Google Is Creating Its Own Amazon Right Under Our Noses

Salesforce Buys MuleSoft for $6.5 Billion in Expansion Quest

China Pushes Qualcomm to Protect Local Companies in NXP Deal

Bayer Wins EU Approval for $62.5 Billion Monsanto Buy

Toyota to Temporarily Halt Driverless-Car Testing in U.S.

Michael Batnick: The Easy Pickings

Ben Carlson: This Year’s Stock Market Losses Are Normal

Joshua Brown: Some Alternatives to Evidence-Based Investing & The Real Reformed Broker

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Now It’s Fiserv’s Turn to Split
Posted by Eddy Elfenbein on March 20th, 2018 at 9:57 am

This morning, Fiserv (FISV) split 2-for-1. Our Buy Below price drops to $72 per share share. In our tracking portfolio, I’m adjusting the starting price to $65.565 per share. The number of shares doubles to 610.0816.

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

U.K. Inflation Slows More Than Expected as Pound Shock Fades

U.S. Plans Heavy China Tariff Hit as Soon as This Week

The Fed Is Signaling More Than 3 Rate Hikes This Year

Four Charts That Show the Tech-Stock Tumble May Not Last Long

Crash Marks 1st Death Involving Fully Autonomous Vehicle

Alex Stamos, Facebook Data Security Chief, To Leave Amid Outcry

Here’s What Wall Street Analysts Are Saying About Facebook’s Data Scandal

Facebook’s Content Issues Are Creating a ‘Tailwind’ For Amazon’s Ad Business

Weinstein Co. Files for Chapter 11 Bankruptcy

Why More Than Just the AT&T-Time Warner Deal Is on Trial

Apple and IBM Unveil Artificial Intelligence Service That Coca-Cola Is Testing

VW Plans $340 Million Expansion at Tennessee Plant

Cullen Roche: Why Are Money Managers Paid So Much?

Howard Lindzon: Momentum Monday…Will Facebook’s Faceplant Carry Over?

Roger Nusbaum: March Magic

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S&P 500 Plunges -1.42%
Posted by Eddy Elfenbein on March 19th, 2018 at 5:44 pm

Today was a rough day for Wall Street. The S&P 500 lost -1.42%. That’s it’s biggest drop since February 8. In the Dow, only Boeing was up. The 29 others were down.

Today was particularly hard for tech. The tech sector lost 2.19%. Facebook was the big loser with a loss of close to 7%. The defensive sectors fared much better. In fact, in terms of relative strength, this was an outstanding day for our Buy List. We beat the S&P 500 by 68 basis points today. Hormel, Smucker, C&D, Ross Stores, ADS and Carriage were up for the day.

Today was a classic countertrend day. A lot of the high-beta, high volatility names that had been doing well got hit hard. On the other side, many of the lagging names did OK.

AFLAC Splits 2-for-1
Posted by Eddy Elfenbein on March 19th, 2018 at 9:56 am

Shares of AFLAC (AFL) split this morning 2-for-1. This means you now have twice as many shares and the share price has fallen in half. Our Buy Below splits as well, so now AFLAC is a buy up to $47 per share.

We’re also adjusting AFLAC’s starting price this year. The year-end closing price was $87.78 per share. Now it’s $43.89 per share. Also, the number of shares in our $1 million tracking portfolio will double from 455.6847 to 911.3694.

Morning News: March 19, 2018
Posted by Eddy Elfenbein on March 19th, 2018 at 7:11 am

Can China’s New Central Banker Restart Reforms?

Xi Taps Harvard-Educated Adviser to Tighten Grip on China’s Economy

Powell Jumps in Driver’s Seat as Fed Weighs Speed of Rate Hikes

Hedge Funds Suffer Worst Month in Two Years

Alibaba Bets Another $2 Billion on Southeast Asia

AT&T’s ‘South Park’ Argument

Google to Convert Product Searches Into Cash

Push to Settle McDonald’s Case, a Threat to Franchise Model

FedEx Follows Amazon Into the Robotic Future

Micro Focus Shares Collapse After Sales Warning and CEO Exit

Claire’s Becomes Latest Retailer to Go Bankrupt

StanChart Fined in Singapore for Money Laundering Breaches

Jeff Miller: A New Direction for the Fed?

Lawrence Hamtil: Oil’s Evolving Role in the Dow Transports

Joshua Brown: Nine Rules for Managing a Creative Culture

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RPM Downgraded
Posted by Eddy Elfenbein on March 16th, 2018 at 3:43 pm

This morning, JPMorgan downgraded RPM International (RPM) from Neutral to Underweight. The shares gapped down at the open but have rebounded some.

CWS Market Review – March 16, 2018
Posted by Eddy Elfenbein on March 16th, 2018 at 7:08 am

“Individuals who cannot master their emotions are ill-suited to profit from the investment process.” – Benjamin Graham

In recent issues, I’ve struck a cautious note to investors. After the brief correction of a few weeks ago, the market rebounded very quickly. Perhaps too quickly.

I still think there’s danger out there. The S&P 500 has now fallen for four days in a row. That’s hardly a disaster, but I’m noticing a few troubling trends just below the surface. I’ll explain more in a bit.

The economic news continues to be mostly positive. We got a very good jobs report last Friday. This week’s inflation report was quite tame, which is reassuring after the surprise from last month.

The big issue ahead is next week’s Fed meeting. The consensus is that the Fed will raise interest rates again. This would be the sixth rate hike of this cycle. But what comes next? That’s not so clear. I’ll lay out what it means for us, but first, let’s look at some of the cracks showing up in the bull market’s foundation.

Tech Has Dominated This Market and It Can’t Last

I have to be up front. This is going to be a rather slim issue because, well…there’s not much going on in the market right now. But that will change very soon.

What has me concerned recently is the divergence between growth stocks and value stocks. The expected relationship is that growth leads value during a bull market, and value grabs the upper hand during a bear market. This time, growth has been giving value a super-atomic wedgie almost nonstop since the middle of 2007.

Value shone briefly in late 2016, after the election. But since the beginning of 2017, growth has been tearing up value. We can see this effect in a few other areas. For example, while the S&P 500 is still well below its all-time high from January, the NASDAQ Composite recently powered its way to a seven-day winning streak and it struck a few new all-time highs.

When we look at classic safe-haven sectors like Utilities, REITs and Consumer Staples, they’ve been left behind. On our Buy List, we can see this in the performance of stocks like Hormel Foods (HRL) and Ingredion (INGR). Meanwhile, the Tech Sector ETF (XLK) seems like it never goes down. Don’t be lured in (note today’s epigraph). Tech has done much of the heavy lifting for this market. The chart below shows the tech sector in red and the consumer staples in blue. Excluding a few high-profile stocks, the overall rally hasn’t been as impressive as it appears.

This trend can’t last. I don’t know when it will end, but we’re closer to the end than to the beginning. I’m not predicting a crash or market blowup, but I do think we may soon see a change in market leadership.

What to do now? Investors should continue to focus on high-quality stocks. On our Buy List, I especially like some of the names that have lagged recently. Ross Stores (ROST) looks quite good especially after its earnings report and dividend hike. JM Smucker (SJM) is going for less than 14 times next year’s earnings. That’s a good deal. Another Buy List stock that’s looking good here is Alliance Data Systems (ADS). In January, ADS creamed earnings, raised guidance and hiked its dividend.

About technology, I was also struck by two key news stories this week. The first is that the government blocked Broadcom’s attempt to buy Qualcomm. Let’s skip over the debate over whether it made business sense or if it’s the right government policy. The fact is that they did it, and this is a big change. Twenty years ago, this kind of merger would have barely raised an eyebrow. Those days are gone.

The other news was that President Trump is planning to impose tariffs on up to $60 billion worth of Chinese imports. I’m not sure how firm the administration is on these plans. I know some people think this is the president’s “opening bid” in an effort to gain concessions later on.

I highlight these stories because I think they quietly signal the end of the post-war consensus on economic issues. For over 25 years, the global economy has moved toward free trade and relaxed regulations. Sure, there have been bumps and bruises along the way, but the free-market orthodoxy has held the higher ground. These two events of this week show that the old conventional wisdom no longer holds.

Preview of Next Week’s Fed Meeting

The Federal Reserve meets again next week. This will be the first meeting with Jay Powell as chairman. The central bank is expected to raise interest rates again. However, what comes next is the big question.

Powell will hold a post-meeting press conference, and the Fed will release updated economic projections. This is what I’m most interested in. In previous projections, the Fed has said it will raise interest rates three times this year. Wall Street seems to buy that. However, there’s a growing belief that they may raise rates a fourth time before the end of the year. That’s quite extraordinary.

Personally, I think the chances of four hikes are remote, but the futures markets currently put the odds at 33%. Seven months ago, the odds were at 0.05%. There are a few factors driving this thesis. The first is that inflation might heat up. There was some concern that the inflation report for January might come in hot. Fortunately, this week’s CPI report showed that inflation was much more subdued in February. I still don’t think inflation is an issue.

There’s also a chance that the economy could be revising up, and that may require elevated rates. It’s possible, but I don’t see the hard evidence just yet. I should note that last Friday’s jobs report (+313,000) was quite good.

There’s also a concern that the budget deficits are unusually high for this point in the cycle. That’s certainly true, but foreign investors seem quite happy to finance our spending. I had a little concern this week when investors weren’t particularly enthusiastic about the recent Treasury auctions. In the bond market, they like to watch the “bid to cover ratio.” That’s simply how much interest there is in the Treasury auction. This week’s auction had some of the weakest ratios in years.

I think of this as an early test of the Trump administration’s fiscal policy. If China, Japan and other countries still gobble up our bonds, then it’s no problem. If not, that’s going to mean higher interest rates. In turn, that means tougher competition for the stock market. It’s not a major issue now, but there’s a chance it could become one down the road.

There hasn’t been much in the way of Buy List news recently. Our next Buy List earnings report will come from FactSet Research Systems (FDS) on March 27. The one after that is RPM International (RPM) on April 5.

We also have two stock splits coming up. AFLAC (AFL) will split 2-for-1 on March 16, and Fiserv (FISV) splits 2-for-1 on March 19. So don’t be alarmed when you see the lower share prices. Our Buy Below prices will split as well.

I should also mention that on Tuesday, AFLAC made a new all-time high. If you recall, the shares plunged 7.4% on January 12 after a negative article appeared. As usual, the long term works to the advantage of superior companies.

That’s all for now. The big news next week will be the Federal Reserve meeting. This will be a two-day affair (Tuesday and Wednesday). Also on Wednesday, we’ll get the latest report on existing-home sales. Then on Friday, the government reports on durable goods. 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

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Sell These 3 Stocks as Amazon Takes Over Banking

Executives across the world are asking themselves the same question: is there no end to the ambitions of Jeff Bezos and Amazon.com (Nasdaq: AMZN)?

A good question since it looks like the company nicknamed the “Death Star” (after the moon-sized, planet-killing weapon from Star Wars) is set to take aim at another industry. Just recently, Amazon seemed to be setting its sights on the freight delivery industry then on the healthcare industry and now its seems to be getting ready to target the financial industry. Although as with healthcare, Amazon is in talks with possible established partners in the sector.

Now Amazon has its sights set on the banking industry. Find out what three financial stocks you need to sell right now to avoid the wrath of the Death Star!

3 REITs Increasing Dividends in April

With a pending interest rate increase from the Fed, I have been receiving questions on whether REIT values will be hurt by rising interest rates. It is a widely held – but inaccurate – belief that REIT values must fall if interest rates continue to increase. The fact that many REITs increase their dividends over time tells us that these are businesses with the potential for growing dividends and share values even in a rising rate environment.

Recently, I read an article that looked at the history of REIT values and interest rates. Since 1995, there has been 15 periods of significantly rising interest rates. Out of those 15, REIT values increased 12, or 75% of the time. In the period from June 2004 through August 2006 the Fed increased rates 16 times. During that period REITs outperformed the S&P 500, 59% to 22%.

The fact is that REIT results are driven more by economic conditions, rising commercial real estate values, and the ability of REITs to increase the rental rates on their properties. We can monitor how well a REIT is performing from its history of dividend growth. Most REITs announce any dividend increases once a year, in the same month each year.

Across the sector there are increase announcements in almost every month in the calendar. You can often get a nice share price gain by buying shares before a dividend increase announcement hits the news wires. I maintain a database that covers about 140 REITs. I use the database to track dividend rates, yields and increases. Of the 140, about 90 have histories of regular dividend increases. Here are three REITs that should announce a dividend increase in April.