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Morning News: October 18, 2016
Posted by Eddy Elfenbein on October 18th, 2016 at 7:13 amU.K. Consumer Prices Rise At Fastest Annual Pace in Nearly Two Years
Calling Tehran: Vodafone Leaps Into Iran With Internet-Service Deal
Saudi Arabia: Give Us Your Money and Stop Asking About Oil
Americans Work 25% More Than Europeans, Study Finds
Johnson & Johnson Earnings Top Estimates on Solid Pharmaceutical Sales
Netflix Shares Just Soared 20%
Why Twitter Is Actually a Media Company
IBM Shares Fall Despite Higher-Than-Expected Sales
UnitedHealth Raises 2016 Forecast, Trumps 3Q Expectations
Burberry Falls Most in a Year as Asian Woes Erode Brexit Gain
Ryanair Cuts Forecast Over a Fall in the British Pound
Remy Cointreau Q2 Sales Accelerate With China, U.S.
Bagel-Coffee Mashups Give Glimpse at JAB’s Caffeine Strategy
Cullen Roche: How Do Indexers Do Better Than Average?
Howard Lindzon: The New Stocktwits Website and Homepage – The Front Page of Finance
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Avoid Stockpickers’ Favorites
Posted by Eddy Elfenbein on October 17th, 2016 at 11:53 amResearch shows that the stocks managers love the most don’t do terribly well.
S&P 500 stocks owned in outsize chunks by mutual fund managers have consistently trailed behind the performance of S&P 500 stocks that are least favored, according to research from Bank of America Merrill Lynch. The pattern has been true since 2008 and has become more pronounced over the past three years, as the pace of redemptions has accelerated, said Savita Subramanian, an equity and quant strategist at Bank of America Merrill Lynch.
“The neglected stocks win by default while the over-owned ones get hammered by outflows,” Ms. Subramanian said.
(…)
Performance of the 10 S&P 500 stocks that active managers own most of, relative to their weight in the index, had trailed the 10 stocks that are least owned by a full 13.4 percentage points in 2016, through September 26. In 2015 and 2014, active managers’ favorite stocks lagged the least-owned ones by 12.6 percentage points and 17.8 percentage points, respectively. The most heavily owned stocks by active managers also trailed the S&P 500 in 2015 and 2014 as least-owned stocks bested the broader market.
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September Industrial Production Rose 0.1%
Posted by Eddy Elfenbein on October 17th, 2016 at 9:36 amThe Federal Reserve said that industrial production rose 0.1% last month. Wall Street had been expecting an increase of 0.2%.
Overall manufacturing output, which accounts for more than three-quarters of all industrial production, rose 0.2% last month. Total factory production has increased in three of the past four months, but was flat in September from a year earlier.
Mining production rose 0.4%, its fourth rise in the past five months. The segment, which includes oil drilling, had been battered by a sustained drop in commodity prices. The latest figures suggest the energy sector has stabilized. Still, overall mining output remains 9.4% below its level from a year earlier.
Utilities output was down 1% from the prior month.
IP fell from November 2014 to March 2016. The scale of the graph makes the decline seem greater than it truly was.
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Morning News: October 17, 2016
Posted by Eddy Elfenbein on October 17th, 2016 at 7:11 amOPEC 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 amThis 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.
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Wells Fargo Has Mixed Earnings
Posted by Eddy Elfenbein on October 14th, 2016 at 11:38 amWells 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.
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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.
Eddy Elfenbein is a Washington, DC-based speaker, portfolio manager and editor of the blog Crossing Wall Street. His