Morning News: January 11, 2017
Posted by Eddy Elfenbein on January 11th, 2017 at 7:00 am

Venezeula’s Awful Economy Got Even Worse in 2016

China’s Xi to Promote Globalization at Davos, Not `War and Poverty’

Saudis Curb Oil to China, Southern Asia as Others Spared

Supreme Court Considers Role of Free Speech in Explaining Credit Card Fees

Trump Tax Cuts Could Jump-Start Global Economy, World Bank Says

IRS Chief Talks Tax Season Open, Refund Delays & Trump Transition Team

What Trump Doesn’t Know About Alibaba’s Jobs Pledge

Walmart Cutting Hundreds of Jobs In Latest Round of Layoffs

Valeant Sells $2.1 Billion in Assets to Ease Debt Burden

Airbus Retains Order Lead Over Boeing With Late Sales Surge

A Trump Tax Cut Could Add $8.2 Billion to Reynolds Price Tag

SoftBank’s $100 Billion Investment Fund Starts to Take Shape

Volkswagen Set to Plead Guilty and to Pay U.S. $4.3 Billion in Deal

Roger Nusbaum: Dow 20,000! Not Yet!

Jeff Miller: Silver Bullet Awards Part Two

Be sure to follow me on Twitter.

“5 Important Economic Metrics to Know”
Posted by Eddy Elfenbein on January 10th, 2017 at 2:31 pm

At US News, Simon Constable writes on five economic metrics you should know. Here’s a sample:

The yield curve. A good predictor of whether economy is about to enter a recession is the difference between the yields of the 2- and 10-year U.S. Treasurys.

“When it’s gone negative – the 2-year is higher than the 10-year – that’s often been an early warning sign of a recession,” says Eddy Elfenbein, author of the Crossing Wall Street blog. “It’s been a much better forecaster than a lot of highly paid Wall Street economists.”

The 10-year T-note is yielding 2.42 percent and the 2-year is yielding 1.21 percent. That means the current difference between the yields of the two bonds is a positive 1.21 percent. “Which means we are in the safe zone, for now,” Elfenbein says.

I agree with myself. Note how the spread has gone negative before recessions (the gray areas).

Small Business Optimism Surges
Posted by Eddy Elfenbein on January 10th, 2017 at 12:28 pm

I normally don’t write about the Small Business Optimism Index, but today’s release was noteworthy because it soared. Actually, “soared” might be understanding it; it skyrocketed. Small business optimism had its biggest rise since 1980.

Optimism among America’s small businesses soared in December by the most since 1980 as expectations about the economy’s prospects improved dramatically in the aftermath of the presidential election.

The National Federation of Independent Business’s index jumped 7.4 points last month to 105.8, the highest since the end of 2004, from 98.4. While seven of the 10 components increased in December, 73 percent of the monthly advance was due to more upbeat views about the outlook for sales and the economy, the Washington-based group said.

Obviously, this is a group that skews Republican. But still, that optimism is real and can translate into more spending and more jobs.

Fifty percent of respondents, the biggest share since March 2002, said they expect better business conditions in the next six months. That was 38 percentage points higher than in November. The net share of firms projecting higher sales jumped by 20 points to 31 percent. Some 29 percent say they will boost capital outlays within six months.

“We haven’t seen numbers like this in a long time,” Juanita Duggan, president and chief executive of the NFIB, said in a statement. “Small business is ready for a breakout, and that can only mean very good things for the U.S. economy. Business owners are feeling better about taking risks and making investments.”

The Growth/Value Cycle
Posted by Eddy Elfenbein on January 10th, 2017 at 12:17 pm

Every so often, I like to see where we are in the Growth/Value Cycle. This is a simple chart. I take the S&P 500 Value Index and divide it by the S&P 500 Growth Index.

Let me caution you that this isn’t some deep metric of where the market is going. Instead, it’s a very general read on what the market has done.

The important point for investors to see is that the stock market generally moves in multi-year periods of favoring growth over value; then the opposite happens. Understanding this is important in beating the market. For the most part, growth leads when things are optimistic, and value becomes popular when people get scared. That’s pretty much basic human psychology.

This relationship has gotten a little out of balance lately because many banks were lumped in with value stocks. You can see how value did very well when the the Tech Bubble burst (making up for their lagging performance). But value never had its day in the sun following the financial crisis.

Value peaked against growth in May 2007, and it bottomed out last January. There were several false starts along the way. Now that value has been leading for nearly a year, I’m still not convinced that the value cycle has turned. Again, it was the bank rally that spurred the Value Index after the election, and that probably reflects newfound optimism for the economy. In other words, I’m not sure this metric measures what it used to.

Morning News: January 10, 2017
Posted by Eddy Elfenbein on January 10th, 2017 at 7:07 am

Dollar Retreats as Trump Euphoria Ebbs, Gold Gains

Tillerson Must Answer for Trump, Big Oil, Even Putin in Hearing

Donald Trump and Alibaba Founder to Create ‘1 Million’ U.S. Jobs? Unlikely.

Alibaba to Help China Retailer Intime Go Private in $2.6 Billion Deal

Marissa Mayer to Leave Yahoo Board; Yahoo to Change Name to Altaba

Snap Makes U.K. Tax Hub as Part of International Expansion

Valeant to Sell Dendreon Unit to China’s Sanpower for $820 Million

China is Finally Able to Manufacture Its Own Ballpoint Pens

Better Known for Candy, Mars Makes a Big Bet on Pets

Takeda Expands Cancer Business With $4.66 Billion Ariad Deal

UnitedHealth Group to Buy Outpatient Surgery Chain for $2.3 Billion

The Limited Suddenly Shut Down All of Its Stores and Laid Off Thousands of Workers

Volkswagen Executive’s Trip to U.S. Allowed F.B.I. to Pounce

Cullen Roche: The Cash Freeze

Jeff Carter: Is It A Tool or a Platform?

Be sure to follow me on Twitter.

Earnings Cycle For The New Buy List
Posted by Eddy Elfenbein on January 9th, 2017 at 3:05 pm

In a few days, I’ll post the earnings calendar for our Buy List.

Twenty of our 25 Buy List stocks follow the March/June/September/December reporting cycle. That means they’ll report their earnings (for the most part) between mid-January and early-February.

Four of our Buy List stocks, Smucker (SJM), Ross Stores (ROST), Hormel (HRL) and HEICO (HEI), follow the January/April/July/October cycle.

One stock, RPM International (RPM), followed February/May/August/November. RPM just reported earnings last week.

I do the best I can with listing the earnings dates, but some companies are, shall we say, less forthcoming than others.

Steve Omohundro on Costly Signalling
Posted by Eddy Elfenbein on January 9th, 2017 at 11:24 am

This year’s Edge question is, what scientific term or concept ought to be more widely known? Here’s a bit from Steve Omohundro’s entry on Costly Signalling.

If something doesn’t make sense, your go-to hypothesis should be “costly signalling.” The core idea is more than a century old, but new wrinkles deserve wider exposure. Veblen’s “conspicuous consumption” explained why people lit their cigars with $100 bills as a costly signal of their wealth. Later economists showed that a signal of a hidden trait becomes reliable if the cost of faking it is more than the expected gain. For example, Spence showed that college degrees (even in irrelevant subjects) can reliably signal good future employees because they are too costly for bad employees to obtain.

Darwin said, “The sight of a feather in a peacock’s tail, whenever I gaze at it, makes me sick!” because he couldn’t see its adaptive benefit. It makes perfect sense as a costly signal, however, because the peacock has to be quite fit to survive with a tail like that! Why do strong gazelles waste time and energy “stotting” (jumping vertically) when they see a cheetah? That is a costly signal of their strength and the cheetahs chase after other gazelles. Biologists came to accept the idea only in 1990 and now apply it to signalling between parents and offspring, predator and prey, males and females, siblings, and many other relationships.

Technology is just getting on the bandwagon. The integrity of the cryptocurrency “bitcoin” is maintained by bitcoin “miners” who get paid in bitcoin. The primary deception risk is “sybil attacks,” where a single participant pretends to be many miners in an attempt to subvert the network’s integrity. Bitcoin counters this by requiring miners to solve costly cryptographic puzzles in order to add blocks to the blockchain. Bitcoin mining currently burns up a gigawatt of electricity, which is about a billion dollars a year at US rates. Venezuela is in economic turmoil and some starving citizens are resorting to breaking into zoos to eat the animals. At the same time, enterprising Venezuelan bitcoin miners are using the cheap electricity there to earn $1200 per day. Notice the strangeness of this: By proving they have uselessly burned up precious resources, they cause another country to send them food!

VCA Inc. Is Being Bought for $7.7 Billion
Posted by Eddy Elfenbein on January 9th, 2017 at 10:50 am

This morning, Mars said they’re buying VCA Inc. (WOOF) for $7.7 billion, or $93 per share. That’s a 31% premium.

I have nothing to say about the deal, but I will note that WOOF is one of my all-time favorite ticker symbols.

Good News: Banks Are Boring Again
Posted by Eddy Elfenbein on January 9th, 2017 at 10:40 am

As a very general rule, it’s good for the banking sector to be boring. You don’t want your country’s banking sector to be making too many headlines. If they’re in the news, it’s probably not good.

Here’s a look at the one-year trailing standard deviation for the S&P 500 (red line) and the S&P 500 Financial Sector (blue line). The financial sector has generally been more volatile, but the distance between the two has gradually decreased.

During the Financial Crisis, bank stocks weren’t just more volatile, they were a lot more volatile. If anything, thanks to Brexit, banks got a little more volatile in the past year, but I expect that to subside. This Friday, the big three major banks will report earnings. The good news for investors is that the earnings won’t be a very big deal.

Morning News: January 9, 2017
Posted by Eddy Elfenbein on January 9th, 2017 at 6:49 am

Pound Falls to 10-Week Low as May Hints at Single-Market Exit

Theresa May Prepares to Walk `Brexit’ Tightrope With Speech

Brazil Worries the ‘China of South America’ Is Eating Its Lunch

Uber Extends an Olive Branch to Local Governments: Its Data

F.B.I. Arrests Volkswagen Executive on Conspiracy Charges in Emissions Scandal

How Ford Redirected Trump’s Criticism Toward Rival GM

Fiat Chrysler Announces Plans to Invest $1 Billion in the U.S.

Detroit Show Reveals a Google-Designed Van That Could Steer the Car Industry

Morgan Stanley, UBS to Raise Stakes in China Securities Joint Ventures to 49%

McDonald’s Sells China Stake to Citic, Carlyle for $1.7 Billion

Sears Unleashes More Confusion By ‘Selling’ The Craftsman Brand To Stanley Black & Decker

Sticker Shock, and Maybe Nausea, Hamper Sales of Virtual Reality Gear

Roger Nusbaum: The Beginning of the End of Hedge Funds As We Know Them?

Jeff Miller: Digging Down on the Trump Effect

Howard Lindzon: Stocktoberfest East and The Cashtag Awards – March 29th and 30th in Manhattan

Be sure to follow me on Twitter.