Good Day for Us
Posted by Eddy Elfenbein on November 29th, 2017 at 4:31 pm

Today was a good day for our Buy List. Our Buy List gained 0.71% while the S&P 500 lost 0.04%.

Of course, we get bad days as well, and I like to take each day with a grain of salt. Around here, we’re always focused on the long run.

Still, we’re human and it’s nice to see us do well. In fact, we’ve been in a bit of a hot streak lately. We’ve outperformed the S&P 500 10 times in the last 13 days. All three underperforming days were quite modest.

For the year, we’re now up 19.40% compared with 17.30% for the S&P 500 (not including dividends).

Here’s how each of our 25 stocks did today. You’ll notice that several really creamed the market.

What made today’s trading interesting was the wide divergence between sectors. For example, the S&P 500 Financials were up 1.77% today while the S&P 500 Techs were down -2.56%.

The Dow Jones Transports gained 3.30% today to close over 10,000 while the Nasdaq lost -1.27%. The Nasdaq 100 lost -1.73%. We haven’t seen that kind of divergence in awhile.

The small-cap Russell 2000 rose 0.38% while the mega-cap S&P 100 fell -0.03%.

The S&P 500 Value Index rose 0.86% and the S&P 500 Growth Index fell -0.73%.

Express Scripts and Axalta News
Posted by Eddy Elfenbein on November 29th, 2017 at 10:12 am

From Forbes:

Humana has been cutting costs, employees and selling non-core assets as rivals in the health and drug benefit management business clean up their balance sheets for possible sale. Others shedding non-core assets include Aetna, which announced plans to sell its group life insurance business and Express Scripts, which this week said it would sell a pharmaceutical support services business to a private equity firm.

(…)

Meanwhile, other healthcare concerns are taking steps to be more nimble should the buyout wave continue. Express Scripts on Monday said it has signed a deal to sell its pharmaceutical support business, United BioSource Corporation, to private equity firm Avista Capital Partners for an undisclosed amount.

Express Scripts and its standalone business model are under pressure as rivals form closer ties with health insurers. UnitedHealth Group has its OptumRx PBM under the larger insurer’s umbrella and, of course, there’s the rumored Aetna sale to CVS Health, which operates the large Caremark PBM.

From Benzinga, an analyst says Axalta could fetch $40 to $45 per share.

KeyBanc Capital Markets analyst Michael Sison discussed the M&A possibilities in a Monday note, reiterated his Overweight rating on shares of Axalta and upped his price target from $36 to $40.

The analyst attributed the price target revision to the takeover potential following Nippon Paint’s interest in Axalta.

The Thesis

The price range needed to clinch a deal would be 13-15 times P/EBITDA or $40-$45, Sison said.

Antitrust isn’t likely to a big issue in the combination of the No. 4 and No. 5 companies in the industry, the analyst said.

The analyst estimates about 12 percent year-over-year EBITDA growth for Axalta in 2018, with 40 percent coming from organic initiatives and a lack of hurricane and customer issues at Refinish.

“We believe pricing will catch up to offset higher raw materials costs experienced in 2017.”

Following 2017’s negative pricing and flattish organic growth performance, Sison said he expects the transportation coating business to rebound in 2018. Axalta’s top-line is projected to grow in the mid-single digits and EBITDA is expected to grow near double-digits as further cost savings initiatives help margins expand by 110 basis points, Sison said.

For the performance coatings segment, KeyBanc sees mid-teens growth in EBITDA, thanks to acquisitions and a more normalized refinish product mix. A 110 basis-point improvement in EBITDA margins is also expected, Sison said.

The Price Action

After Axalta confirmed it’s in discussions with Nippon Paint for over $8.25 billion following the breakdown of its merger talks with Akzo Nobel, the shares of the company rallied about 5 percent Nov. 22.

The shares are up about 31 percent year-to-date.

Q3 GDP Revised up to 3.3%
Posted by Eddy Elfenbein on November 29th, 2017 at 10:06 am

This morning, the government revised its estimate for Q3 GDP up to 3.3% from the initial estimate of 3.0%. Q2 grew by 3.1% so we’ve now had back-to-back quarters of more than 3% growth.

Can we make it three in a row? Maybe. The Atlanta Fed’s forecast for Q4 is now at 3.4%. We won’t see the government’s first report on Q4 until late January.

Morning News: November 29, 2017
Posted by Eddy Elfenbein on November 29th, 2017 at 7:00 am

ECB Says Low Interest Rates Aid Debt Resilience But Risks Remain

Bitcoin Futures Draw Push Back, Not Stop Light From Market Cops

The Internet is Dying. Repealing Net Neutrality Hastens That Death.

Robots Are Coming for Jobs of as Many as 800 Million Worldwide

Trump Starts Probe Into Aluminum That China Calls Protectionist

Trump’s Tax Promises Undercut by CEO Plans to Reward Investors

Jerome Powell Shows Mastery of Central Bank Arts

AT&T Responds to Justice Department Lawsuit

Rebuking Uber Lawyers, Judge Delays Trade Secrets Trial

Uber’s Q3 Loss Widens as SoftBank Makes First Offer on Shares

What We Learned From Retailers’ Five-Day Scramble for Shoppers

Daimler Rebuffs Geely Offer to Buy Stake; Geely Still Hopeful of a Deal

Michael Batnick: This Is Not Normal

Jeff Carter: Can You Short Bitcoin?

Howard Lindzon: Who Do You Trust?… and Live Light and Mobile

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The Decline in the Natural Interest Rate
Posted by Eddy Elfenbein on November 28th, 2017 at 1:10 pm

I’ve written before about the natural interest rate. This is the idea that there’s a magic real interest rate that hangs over the entire globe. When the Fed goes below it, it’s pumping up the economy. When it goes above, it’s pulling the economy back.

The problem is that we never know exactly where the natural rate is. There are, however, some clues. Although we can’t see it, we can see its effects.

Mind you, there are plenty of economists who think all this is for the birds. But John Williams, top dog at the San Francisco Fed, takes it very seriously. He believes that since the recession, the natural rate has plunged, and I’m inclined to agree.

Williams and Thomas Laubach have teamed up to — what else do economists do — make a model of natural rates. Here’s a link to their paper on the subject. Here’s a spreadsheet of their data.

Remember that the natural rate is a real interest rate, meaning adjusted for inflation. I took the data from Williams and Laubach and added the real Fed fund rate. I based mine on core inflation which I think shows the trends better, though I understand some may disagree.

Notice how sharply the red line has plunged since 2008. If that’s right, that means the Fed hasn’t been pushing the economy as hard as you might think. The chart also shows just how aggressive Alan Greenspan was in the period after 9/11. He took the blue line well below the red line. Finally, you can see that the Fed is close to being neutral (meaning, red and blue are the same).

The Fed’s Window Is Closing
Posted by Eddy Elfenbein on November 28th, 2017 at 11:27 am

I’m watching Jay Powell testify before Congress on his nomination for Fed chair. It appears to be smooth sailing.

Speaking of which, here’s another version of a chart I often discuss. This shows the two components of the 2/10 spread. It’s the two-year and ten-year Treasury on the same scale. Notice how quickly they’re converging.

According to the futures market, there’s a 92.8% chance the Fed will raise rates in two weeks. The only dissenting forecast calls for two rate hikes.

The futures market sees another hike in coming in March, although that view is at 50.1%. A hike by June is at 74.8%.

The odds are just slightly against a third hike by November. That means there’s a chance that the 2/10 could invert before the end of 2018.

Consumer Confidence Remains at 17-Year High
Posted by Eddy Elfenbein on November 28th, 2017 at 10:34 am

Yesterday, we learned that new home sales rose to a 10-year high. Today we learned that consumer confidence is still at a 17-year high.

A measure of U.S. consumer confidence rose again in November, hitting yet another 17-year high.

The Conference Board on Tuesday said its index of U.S. consumer confidence increased to 129.5 in November from 126.2 in October. Economists surveyed by The Wall Street Journal had expected a November reading of 124.0.

“”Consumers’ assessment of current conditions improved moderately, while their expectations regarding the short-term outlook improved more so, driven primarily by optimism of further improvements in the labor market,” said Lynn Franco, Director of Economic Indicators at The Conference Board. “Consumers are entering the holiday season in very high spirits and foresee the economy expanding at a healthy pace into the early months of 2018.”

Morning News: November 28, 2017
Posted by Eddy Elfenbein on November 28th, 2017 at 7:03 am

Brexit Stress Lingers Even as U.K. Banks Pass Their Tests

How the Fall of Finance Led to French Tech’s Rise

Cyber Monday Hits New Record At $6.6 Billion, Over $1 Billion More Than 2016

Right and Left React to the Turmoil at the Consumer Finance Watchdog

U.S. Tax Cuts in 2018 Would Give GDP Temporary Boost, OECD Says

Fed Nominee Powell, Once Hawkish, Now Champions Yellen’s Focus on Jobs

Debate Rages Over FTC as Web Referee After Net Neutrality Gutted

Musk: I Am Not Bitcoin’s Satoshi Nakamoto

Pressured for Profit, Oil Majors Bet Big on Shale Technology

OPEC to Back 9-Month Extension, Awaits Russia’s Commitment

Wells Fargo’s Foreign Exchange Bankers Overcharged Tons of Customers

SoftBank Is Said to Offer to Buy Uber Shares at a Steep Discount

Cullen Roche: How to Manage an Asset Price Mania (Like Bitcoin) & Is the US Economy About to Boom?

Roger Nusbaum: Bitcoin, To Infinity & Beyond!

Ben Carlson: Expert Judgment or Lack Thereof

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OPEC’s Moment of Truth
Posted by Eddy Elfenbein on November 27th, 2017 at 12:34 pm

Interesting article on the dynamics currently at work in the global oil market. OPEC reached a deal with Russia to cut supply. It’s working but Saudi Arabia is undergoing an internal revolution, and Venezuela is a mess.

The producers’ efforts to clear the oil surplus are starting to pay off. They’ve drained excess inventories in developed nations this year by 183 million barrels, or more than half of the glut, which now stands at about 140 million barrels, according to OPEC data. That has revived London-traded crude futures, which sank below $45 a barrel this summer, to a two-year high of $64.65 on Nov. 7.

That success goes some way to countering accusations that OPEC had lapsed from the dominant market force of the 1970s and 1980s into irrelevance. Although its 14 members still pump 40 percent of the world’s oil, their share has dwindled from the days when OPEC held the global economy in thrall.

“People may have thought that OPEC was dead, but Saudi Minister Khalid Al-Falih has succeeded in building agreements and alliances within OPEC and non-OPEC, such as Russia, to restrain production,” said Luis Giusti, an adviser at the Center for Strategic and International Studies and former CEO of state-run Petroleos de Venezuela SA.

More on Amazon/Cerner
Posted by Eddy Elfenbein on November 27th, 2017 at 10:11 am

I expect we’ll get more info in the coming days, but here’s an overview:

Amazon is expected to announce this week a major partnership with Cerner Corp. this week.

Andy Jassy, CEO of Amazon Web Services, plans to announce the collaboration at the company’s re:Invent conference this week, CNBC reports. Jassy is scheduled to deliver the conference’s keynote address on Wednesday.

According to CNBC, Amazon.com Inc.’s cloud computing unit will work with Cerner and the North Kansas City company’s HealtheIntent product. Citing unnamed sources, the report said that AWS and Cerner are in the late stages of talks.

The population health management product allows health care systems to analyze data to predict outcomes within a population. This can allow systems to step in earlier to improve patients’ health and to coordinate care. For example, a pilot program with Truman Medical Centers will use the platform to track patients with heart failure and diabetes and send automated alerts to care providers when intervention is necessary.

A Cerner executive gave a presentation on HealtheIntent and the use of AWS’s storage and computing power with the product at last year’s re:Invent conference.

A more extensive teaming of AWS and Cerner on population health could help both giants expand upon their efforts as health care providers turn to big data as a means of improving care and cutting costs. In July, CNBC reported that Amazon had created a special stealth team to focus on opportunities with electronic medical records and telemedicine. On the consumer side, The St. Louis Post-Dispatch reported last month that Amazon had received wholesale pharmacy licenses in at least a dozen states.