Morning News: October 17, 2016
Posted by Eddy Elfenbein on October 17th, 2016 at 7:11 am

OPEC Spat Over Production Data Grows as Iran Rejects Estimates

BOJ Kuroda: To Adjust Policy As Needed To Hit 2% Price Goal

Australian Casino Staff Detained in Chinese Gambling Probe

Big Winner From London’s Brexit Exodus Isn’t Even in Europe

Bank of America’s Profit Rises as Sales and Trading Revenue Climbs

Can Verizon Renege On Its Yahoo Deal?

Tesla, Panasonic to Collaborate on Solar Cells Production

PepsiCo Sets Global Target For Sugar Reduction

How Caterpillar’s Big Bet Backfired

Kyushu Railway on Track for Top-Price IPO

Lack of New Blood Casts Doubt Over Wells Fargo’s Change Plan

ICICI Surges Most Since March on Essar Debt-Recovery Hopes

Why Retailers Are Rethinking Thanksgiving Day

Weighing the Week Ahead: Has the Market Rotation Begun?

Josh Brown: Friends and Trends

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Retail Sales Climbs
Posted by Eddy Elfenbein on October 14th, 2016 at 11:53 am

This morning’s September retail sales report showed a 0.6% advance. That’s the most in three months. August’s figure was a revised 0.2% decline.

From Bloomberg:

Retail sales climbed in September by the most in three months, showing American shoppers began to spend freely again after shying away from merchants earlier in the quarter.

The 0.6 percent advance followed a revised 0.2 percent decline in August, Commerce Department figures showed Friday. So-called core sales, used to calculate gross domestic product, rose a smaller-than-projected 0.1 percent.

Years of increased hiring and a slow acceleration in worker pay have laid a foundation for steady household spending. While third-quarter purchases will probably fall short of the vigorous pace from April through June, the broad-based pickup across the retail spectrum shows household demand may be gathering pace.

“The combination of solid job growth, while slowing, modest pickup in wages, and pretty good measures of household net worth should continue to push consumer spending up over the next year,” said David Berson, chief economist at Nationwide Insurance in Columbus, Ohio.

The median forecast for retail sales in a survey of 77 economists was a 0.6 percent increase. Estimates ranged from gains of 0.2 percent to 1 percent. August was revised from an initially reported 0.3 percent decline.

The small gain in September retail control group sales, the figure that’s used to calculate gross domestic product and which excludes such categories as autos, gasoline stations and building materials, was weaker than the 0.4 percent median forecast and followed declines in the previous two months.

Wells Fargo Has Mixed Earnings
Posted by Eddy Elfenbein on October 14th, 2016 at 11:38 am

Wells Fargo (WFC) released mixed earnings this morning.

For Q3, the bank earned $1.03 per share which beat estimates by two cents per share. Total revenue of $22.328 billion was slightly higher than the expected $22.21 billion. Yet current-quarter net income fell to $5.64 billion from $5.8 billion in Q3 2015, a 3% decline.

WFC said total average loans were up $62.4 billion, or 7%, to $957.5 billion over the third quarter one year ago. Total average deposits were also up $62.7 billion to $1.3 trillion, 5% higher than Q3 2015.

CWS Market Review – October 14, 2016
Posted by Eddy Elfenbein on October 14th, 2016 at 7:08 am

“Successful investing is anticipating the anticipations of others.” – J.M. Keynes

Earnings season has finally arrived. Everything we’re hearing about elections, the Fed and GDP — it all pales in comparison to earnings season. Over the next three weeks, 16 of our 20 Buy List stocks are due to report earnings. This is when we’ll learn how well our companies are performing.

Overall, I’m expecting very good results from our stocks. They’re generally much better than average. The only hitch is that you never know exactly what the market will do—even with a good earnings report. (I always find it amusing when a stock beats expectations, then falls. So what did traders expect?)

In this week’s CWS Market Review, we’ll preview five Buy List earnings reports coming our way next week. Before I get to that, I want to fill you in on the latest jobs report, as well as the minutes of the Fed’s September meeting.

The U.S. Economy Created 156,000 Jobs in September

Last Friday, the government reported that the U.S. economy created 156,000 net new jobs last month. That’s an okay report, but it’s nothing great. Wall Street had been expecting 176,000. The unemployment rate rose to 5.0%.

I was particularly curious to see how wages did. After all, that’s where future revenue comes from. According to the report, average hourly earnings rose by 0.2% in September. In the last year, average hourly earnings are up 2.6%. The wage numbers are getting better, but I want to see a lot more improvement.

On Wednesday, the Fed released the minutes from its September meeting. If you recall, the FOMC again decided against raising rates, but there were three dissenting votes. All of them wanted to raise rates immediately.

The minutes contained this line (as always, I apologize for the barely comprehensible dialect known as Fed-speak): “Members generally agreed that the case for an increase in the policy rate had strengthened.” Poker players call that a “tell.” I realize it sounds mild mannered, but that line wouldn’t have gone in there unless there’s a growing bloc of hawks inside the FOMC. That line is key.

Here’s my take: I strongly doubt that the last jobs report will deter the Fed. I still think that they’ll hold off raising rates next month but will go ahead with a hike in December. But I must stress that investors have nothing to fear from a rate hike. The danger is only when the Fed goes too far, and we’re a long way from that.

The Charting New Year Started on February 11

Financial markets are really all about trends. Once a trend is established, it can stay in place a long time, longer than you thought possible. But like all good things, trends come to an end.

As far as the stock market’s concerned, the new year began on February 11. I realize that sounds odd, but hear me out. That’s because February 11 is when all the current trends started—and these trends have been as trendy as ever lately. The old Wall Street saying is that the “trend is your friend.” Actually, I would say the “trend is your frenemy” because you never know when it will end.

On February 11, the S&P 500 touched a two-year low of 1,810. The index first tested and then dropped below the “Tchaikovsky Low” of 1,812 reached a few weeks before. The first six weeks of this year marked the worst start to a year in the history of the S&P 500. Not only did stocks bottom out on February 11, but so did oil. West Texas Crude closed at $27.30 per barrel. That was a 12-year low. In 20 months, oil fell roughly by three-fourths.

Along with the drop in oil, the junk-bond market fell flat on its face. Junk bonds were demanding a massive premium of nearly 9% over other bonds. That’s gigantic. At that time, the futures market had basically written off the idea of the Fed hiking rates in 2016 or 2017. Congress was even asking Janet Yellen about negative rates.

All of these events are connected by one factor—a dire fear of taking risk. The trend ever since then, when the technical new year began, has been a reversing of that. Over the last eight months, the constant trend has been one of investors warming up to more and more risk.

Not only is this true between the markets, but we also see it within the stock market. On February 11, high-beta stocks started leading the broader market, as did financial stocks. The chart above shows how soundly high beta has beaten low vol. In the weeks leading up to February 11, bank stocks had been demolished. No rate hikes means no profit for Johnny Lender. Small-cap stocks, which tend to be riskier, got a slight head start and started leading the market on February 10.

What’s also part of this trend is the shift away from conservative sectors like Utilities and high-quality stocks and towards economically cyclical sectors. In particular, this means Energy, Materials and Industrials. Oil recently broke above $51 per barrel. Frankly, the shift from high-quality areas is probably impacting our Buy List as a whole this year.

I won’t predict how long this trend will play out. That’s a game not worth playing. But I want investors to understand what’s happening. Overall, an appetite for more risk is a good thing. But like many things, too much of it can be very bad.

Next Week’s Buy List Earnings Reports

Wells Fargo (WFC) is due to report earnings later today. The big news is that late Wednesday, CEO John Stumpf decided to retire, effective immediately. I had been urging this for the last few issues. This needs to be the start of a house-cleaning, but it’s a good first step.

Not surprisingly, shares of WFC were trading higher in the after-hours market after news of Stumpf’s resignation came out. As a general rule, if news of your resignation causes your company’s stock to gain $4 billion in market value, you probably won’t be missed. Timothy J. Sloan will take over as the new CEO. Mr Stumpf will not be getting a severance package.

Bear in mind just how large an organization Wells Fargo is. For Q3, Wall Street expects earnings of $1.01 per share. That sounds about right; maybe it’s a tad low. Don’t give up just yet on Wells. The problem there is fixable, but they need to make the right moves now. Check the blog for an update on the earnings report.

We have five more Buy List earnings reports next week, plus eight for the week after that. Here’s a calendar showing each stock’s earnings date and Wall Street’s estimates.

Now let’s look at our earnings reports for next week.

On Tuesday, Signature Bank (SBNY) is due to report its Q3 earnings. I like SBNY a lot, but the stock has done very poorly this year. I like it when a good company has a poorly-performing stock. It’s not a guarantee of a winner, but it’s a good sign of one.

Signature’s Q2 earnings report was a dud. They missed estimates by seven cents per share. Overall, the bank is doing well, but they’ve been getting squeezed by bad taxi-medallion loans. Uber and ride-sharing companies have greatly impacted the cab industry, and by extension, medallion prices. SBNY used to have a nice business financing these medallions. It’s not so nice anymore.

The key here is that the problem is known. Signature said they’ll continue to have issues with this, but it’s hardly going to sink the bank. Wall Street’s estimate for Q3 is $2.01 per share.

Four Buy List Earnings Reports Due on Thursday

Next Thursday, October 20, will be a big day for earnings. Four of our Buy List stocks are due to report.

Alliance Data Systems (ADS) has had a difficult year so far. I thought that the impressive earnings report for Q2 would turn things around, but the shares haven’t done much. For Q3, Alliance said they project earnings of $4.42 per share. The Street had been expecting $4.58. The company sees full-year earnings coming in at $16.85 per share.

Microsoft (MSFT) has been one of the most impressive stocks on our Buy List. It’s odd how such a well-known stock can surprise you. I should say that I’ve been impressed with MSFT’s numbers, even if the shares haven’t been quite so impressive.

The last earnings report was very good—especially the company’s cloud business—and the stock rallied to $58 per share. But that price has been a brick wall ever since. The 52-week high is $58.70 from late August, and the stock sputters out every time it gets close to that. Why? Who knows! The market’s gods can be capricious. Perhaps another good earnings report could be a catalyst for a breakout. Wall Street expects 68 cents per share.

Shares of Snap-on (SNA) rallied impressively off the February low, but they’ve gradually slid back since the spring. The last earnings report was good, but the top-line number was a little weak. Wall Street’s current estimate is for $2.15 per share.

Wabtec (WAB) has been having a difficult year, but I still like the company. The problem is its freight business, which has been under pressure. WAB lowered its full-year earnings to a range of $4 to $4.20 per share. The previous range was $4.30 to $4.50 per share.

That’s all for now. Next week will be crowded with earnings. Also, on Monday we’ll get the latest report on industrial production. Tuesday is the CPI. On Wednesday, we’ll mercifully have the final presidential debate. That will also be the 29th anniversary of the 1987 crash. I’m sure that’s just a coincidence. The Fed will also release its Beige Book on Wednesday. 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: October 14, 2016
Posted by Eddy Elfenbein on October 14th, 2016 at 7:03 am

China Inflation Relief Sends Stocks, Dollar Higher

Europe Car Sales Hit September Record

Flight of the Brexit Bankers

Treasury Tries Again To Keep American Firms’ Taxes In U.S.

Wells Fargo’s John Stumpf Is the Latest Victim of ‘CEO of the Year’ Curse

JPMorgan Posts $6.3 Billion Profit as Bond-Trading Revenue Rises

Verizon Puts Yahoo on Notice After Data Breach

Samsung Predicts 3 Billion Hit to Future Profits After Pulling Galaxy Note 7

Snapchat Heads For Possible $25 Billion Flotation

Softbank’s New $100B Tech Fund Shows Exactly How It’s Expanding Beyond Telco

HP Plans Up to 4,000 Job Cuts Over Three Years

Uber Drivers Secure Unemployment Benefits

The Cheap Airfare Party Is About to End

Josh Brown: When Did The Bull Market Begin, IRL?

Jeff Miller: Stock Exchange: Great Chart Ideas Include WB, DDD, DXCM, and APD

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Lowest Initial Claims Report Since 1973
Posted by Eddy Elfenbein on October 13th, 2016 at 9:15 am

We finally broke it. Today’s initial claims report came in at 246,000. That’s the lowest since November 24, 1973 when the report was 233,000.

Morning News: October 13, 2016
Posted by Eddy Elfenbein on October 13th, 2016 at 7:07 am

Disappointing China Trade Data Spurs Fears Recovery May Be Faltering

China Tops US in Numbers of Billionaires

Deutsche Bank Said to Implement Hiring Freeze as CEO Cuts Costs

New Wells Fargo CEO Just Months Ago Denied the Bank Had a Sales Problem

Hanjin Shipping Puts Asia-U.S. Shipping Network Up For Sale

Ericsson’s Inefficiency Seen Leading to Further Job Reductions

Snapchat Picks Morgan Stanley, Goldman To Lead IPO

Kirin Bets on Future of Craft Beer With Brooklyn Brewery Stake

Unilever Defends Brexit Price Rises After Tesco Spat

Stanley’s Tool Deal Measures Up

Uber Drivers Ruled Eligible for Jobless Payments in New York State

Chevron Confirms Is In Discussions For Potential Bangladesh Sale

SEC Said to Demand That Cooperman Agree to Hedge Fund Suspension

Jeff Carter: What If All The Poor People Were Gone?

Roger Nusbaum: Managing Obvious Risks

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Stumpf Out at Wells Fargo
Posted by Eddy Elfenbein on October 12th, 2016 at 5:04 pm

Finally! John Stumpf is out as CEO of Wells Fargo.

Here’s the WSJ:

Wells Fargo & Co. Chairman and Chief Executive John Stumpf, under fire for the bank’s sales-tactics scandal and his own handling of its fallout, is stepping down from both roles, effective immediately, the bank said Wednesday.

Mr. Stumpf will be replaced as head of the third-largest U.S. bank by assets by President and Chief Operating Officer Timothy J. Sloan, who was widely seen as his heir apparent.

Mr. Stumpf won’t receive a severance package, the bank said. The board, at Mr. Stumpf’s own recommendation, had previously decided he should relinquish $41 million in unvested equity, one of the biggest-ever forfeitures of pay by a bank chief. He still retires with tens of millions of dollars earned during roughly 35 years at the bank.

Fed Minutes from their September Meeting
Posted by Eddy Elfenbein on October 12th, 2016 at 2:37 pm

The Federal Reserve just released the minutes from their last meeting. These minutes are usually pretty dull, and this latest batch is no exception.

Here’s a key passage and it highlights why I think rates will go up in December.

Members continued to expect inflation to remain low in the near term, but most anticipated that, with gradual adjustments in the stance of monetary policy, it would rise gradually to the Committee’s 2 percent objective over the medium term. Many members remarked that there were few signs of emerging inflationary pressures or that progress on inflation had been slow. A couple of other members pointed to recent readings on core CPI inflation as suggesting that PCE price inflation was close to meeting the Committee’s 2 percent inflation objective. Nonetheless, in light of the current shortfall of inflation from 2 percent, members agreed that they would continue to carefully monitor actual and expected progress toward the Committee’s inflation goal.

After assessing the outlook for economic activity, the labor market, and inflation, as well as the risks around that outlook, the Committee decided to maintain the target range for the federal funds rate at 1/4 to 1/2 percent at this meeting. Members generally agreed that the case for an increase in the policy rate had strengthened. But, with some slack likely remaining in the labor market and inflation continuing to run below the Committee’s objective, a majority of members judged that the Committee should, for the time being, await further evidence of progress toward its objectives of maximum employment and 2 percent inflation before increasing the target range for the federal funds rate. It was noted that a reasonable argument could be made either for an increase at this meeting or for waiting for some additional information on the labor market and inflation. A couple of members emphasized that a cautious approach to removing accommodation was warranted given the proximity of policy rates to the effective lower bound, as the Committee had more scope to increase policy rates, if necessary, than to reduce them. Three members preferred to raise the target range for the federal funds rate by 25 basis points at this meeting. They cautioned that postponing policy firming for too long could push the unemployment rate markedly below its longer-run normal rate over the next few years. If so, the Committee might then need to tighten policy more rapidly, thereby posing risks to continued economic expansion. A couple of these members expressed concern about the potential adverse effects on the credibility of the Committee’s policy communications if the next step in the gradual removal of accommodation was further postponed.

Morning News: October 12, 2016
Posted by Eddy Elfenbein on October 12th, 2016 at 7:14 am

What The Heck’s Going On With The New Global Reserve Currency, The Chinese Yuan?

Eurozone Industrial Production Picks Up in August

China Car Sales Rise Sharply in September

Central Banks Consider Bitcoin’s Technology, If Not Bitcoin

Comcast Paying $2.3 Million to Settle FCC Probe

Ericsson Shares Plummet After It Warns on Profit and Outlook

Toyota Motor, Suzuki in Talks on Business Partnership

GM Buys Stake in Chinese Car-Sharing Company

Theranos Accused of Duping Investors in Tests, Performance

Amazon to Expand Grocery Business With New Convenience Stores

Alcoa Stock Tumbles as Profit, Revenue Miss Expectations

Google Bought A Company That Helps Brands Get Product Placements in YouTube Videos

The World’s Best IPO Has Gained 6,000%, But Analysts Say Stay Away

Jeff Carter: Make Bets Where Decision Making Is Intuitive, and Market is Inefficient

Cullen Roche: How the GOP Lost A Slam Dunk Election

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