• Utes Vs. Financials
    Posted by on October 4th, 2016 at 2:04 pm

    Here’s a point I want to stress that’s a bit difficult to explain. In the last year, the financial markets have become increasingly focused on the direction of short-term interest rates.

    The chart below shows the relative strength of financial stocks (blue) and the relative strength of utilities (black). Notice that the two lines start to move in opposite directions about a year ago. Prior to that, the lines don’t appear to be terribly correlated.

    sc10042016a

    After about the first of this year, the lines really become mirror images. What this means is that the axis of debate in the market has shifted towards short-term rates. If rates go up, that’s good for financials (in a relative sense). If not, that’s good for utilities and other high-yielding stocks.

    It’s interesting that as recently as late 2014, the two lines appear to move the same way. Not so for 2016. On the chart above, notice the correlation difference between 2014 and 2016. It’s a changing market.

  • Gold Drops 2% as Fed Doves Retreat
    Posted by on October 4th, 2016 at 11:12 am

    Gold is down about 2% today. It’s now at a post-Brexit low. I think this is due to a few things. For one, I think the holdouts against the Fed raising rates in December are starting to give in. The Fed has been a lot more careful about telegraphing their intentions. Remember, there were three dissents at the last meeting.

    Gold’s had a pretty strong run since late last year. However, it hasn’t been able to breakout to a new high in several weeks. That could be a bad omen. I also think the good ISM from yesterday is also working in the December Hike camp. The futures market now says there’s a 63% chance of a December hike. I think that’s too low.

    Prior to Brexit, gold had been losing momentum and the Brexit vote may have given the gold trade more legs this summer. Prime Minister Theresa May has pledged to go ahead with the Brexit negotiations. Today, the pound touched a 31-year low against the U.S. dollar.

  • Morning News: October 4, 2016
    Posted by on October 4th, 2016 at 7:19 am

    Existential Threat to World Order Confronts Elite at IMF Meeting

    Oil Prices Fall on Skepticism Over OPEC’s Efficacy

    FTSE 100 Rises as Pound Slumps on EU-Exit Date

    Indian Central Bank’s New Regime Cuts Rates

    The Supreme Court Will Hear Its First Insider-Trading Case in 20 Years

    U.S. Tech Giants Are Investing Billions to Keep Data in Europe

    Apple Launches Apple Pay Payment Service in Russia

    Ericsson to Cut 3,000 Jobs in Sweden as Network Demand Wanes

    LVMH to Pay Over $700 Million for a Stake in This High-Tech Luggage Maker

    Olive Garden Pushes Darden’s Results Past Expectations

    Salesforce Agrees to Buy Marketing-Data Startup Krux

    GoEuro Banks Another $70 Million to Keep Building Out Its Travel Planner Platform

    Cantor Fitzgerald Gambling Affiliate Settles Investigation

    Roger Nusbaum: What the FARC?

    Cullen Roche: Do Trump’s Taxes Matter?

    Be sure to follow me on Twitter.

  • Companies Tend to Show Election Anxiety
    Posted by on October 3rd, 2016 at 4:37 pm

  • Macau Number Boosts Casino Stocks
    Posted by on October 3rd, 2016 at 4:36 pm

  • 30 Years of Church & Dwight
    Posted by on October 3rd, 2016 at 11:28 am

    Here’s a great long-term chart of Church & Dwight (CHD). Apparently, condoms are profitable.

    one

  • The Morning Market
    Posted by on October 3rd, 2016 at 11:08 am

    Shares of Cognizant Technology Solutions (CTSH) are walking back some of their big losses from Friday. There doesn’t appear to be any new information here. CTSH is currently up 7% today.

    Ford Motor (F) said that its sales were down 7.7% last month. That actually beat expectations. Overall, the auto industry is still doing well. Last month, Ford’s truck sales fell a bit but they’re still near record levels. Shares of Ford are up today.

    Two econ reports this morning. The ISM Manufacturing Index for September came in at 51.5. That’s more than I had been expecting. That’s up from 49.4 in August.

    The Commerce Department said that construction spending fell 0.7% in September. Wall Street had been expecting an increase of 0.2%.

    In Britain, Theresa May said she’s pushing forward with Brexit plans. That caused the pound to fall to a near-30-year low.

  • Morning News: October 3, 2016
    Posted by on October 3rd, 2016 at 7:09 am

    Oil Prices Rise on OPEC Optimism

    Japan Big Manufacturers’ Mood Flat in Fragile Economic Recovery: BOJ Tankan

    Sterling Sinks to Three-Year Low on Brexit, European Banks Struggle Again

    U.K. Chancellor Plans Investment as Brexit Creates Business Uncertainty

    U.K. Factories Boom as Pound’s Brexit Plunge Boosts Exports

    World Bank: Boosted Spending Can Expand Philippine Economy

    Shanghai Regulators Fine OSI and Unit More Than $3.6 Million for Meat Scandal

    What Should and Shouldn’t Worry Us About Deutsche Bank

    Macau Is Back In Black Thanks To New Adelson, Wynn Launches — But Will It Last?

    Here’s Who Is Expected to Buy the Cabela’s Sporting Goods Chain

    AstraZeneca Licenses Inflammatory Disease Candidate to Allergan

    Rebel Teens Are Killing America’s Clothing Giants

    Janus to Merge With Henderson, Forming Asset Management Giant

    Jeff Miller: Time To Look Past The Gloom?

    Howard Lindzon: The IPO Process – It Is Time to Fix It

    Be sure to follow me on Twitter.

  • Cognizant Drops on Payments Investigation
    Posted by on September 30th, 2016 at 9:51 am

    From Bloomberg:

    Cognizant Technology Solutions Corp. tumbled in early trading after revealing an internal investigation into whether some payments in India violated the U.S. Foreign Corrupt Practices Act.

    The investigation is currently focused on a small number of company-owned facilities and is being conducted under oversight by the board’s audit committee, with assistance from outside counsel, according to a filing Friday. The information technology services company has voluntarily notified the U.S. Department of Justice and the U.S. Securities and Exchange Commission and is working with the agencies.

    “The company is not able to predict what, if any, action may be taken by the DOJ, SEC, or any governmental authority in connection with the investigation or the effect of the matter on the company’s results of operations, cash flows or financial position,” Cognizant wrote in the filing.

    Note that the Cognizant investigation began internally and then they notified the SEC. The shares are down about 12% today.

  • CWS Market Review – September 30, 2016
    Posted by on September 30th, 2016 at 7:08 am

    “If I had to live my life again, I’d make the same mistakes, only sooner.”
    – Tallulah Bankhead

    Today is the final day of the third quarter, and for the fourteenth time in the last fifteen quarters, this looks to be a positive one for the S&P 500. Despite a modest uptick in volatility this month, the S&P 500 is still less than 2% from an all-time high.

    But there’s still a lot of uncertainty for Wall Street, and at the top of the list is Election Day. The polls indicate that it’s a close race between Hillary Clinton and Donald Trump. In this week’s CWS Market Review, I want to address the very sensitive subject of politics and financial markets.

    big09302016

    Don’t worry—you won’t hear me spouting off on politics. Quite the opposite. I want to tell you why politics and investing are a bad mix. I always encourage investors to keep their political passions far away from their investing strategies. Going about your investments should be as coldly rational a process as possible. I’ve seen too many investors let their politics ruin a good portfolio.

    Later on, I’ll cover some recent news from our Buy List and the economy. The good news is that the economy continues to move along, but at a slow and meandering pace. For the market, we have Q3 earnings season to look forward to in a few weeks. Before we get to that, let’s take a closer look at the dangerous intersection of politics and the stock market.

    Keep Politics out of Your Portfolio

    Election Day is now less than six weeks away. The election news seems to dominate everything on television, as well as most people’s conversation. Personally, I can’t wait for election season to pass.

    There’s a story that Richard Nixon was once asked what he would do if he wasn’t president of the United States. Nixon said that he’d probably be down on Wall Street buying stocks. This led one old-time Wall Streeter to say that if Nixon weren’t president, he too would be buying stocks.

    It’s a funny story, but I don’t think it makes for good advice. This often surprises investors, but I don’t believe partisan politics has a strong influence on the stock market. Stocks have done well under both Republicans and Democrats, and they’ve also done poorly under both.

    I have many friends who insisted to me that President Obama is a radical socialist, yet the stock market has done very well under his tenure. I also have Democratic friends who think the president deserves most of the credit for the bull market. I’m skeptical. The fact is, the stock market doesn’t really care much who’s president.

    This type of analysis misses the point on both what the stock market is, and the powers of the office of the presidency. People assume that presidents are like players in a game, and the stock market is the scoreboard. In my opinion, it’s the exact opposite. The market is always the market. It’s never up for reelection: instead, it’s the politicians who alter their beliefs to assuage the market gods.

    James Carville, one of Bill Clinton’s advisors, famously said that if reincarnation is real, he’d like to come back as the bond market because “you can intimidate everybody.”

    What the stock market wants is actually quite simple—money. Or more specifically, the net present value of all future cash flows. A strong economy obviously helps, but even the relationship of the market to the economy isn’t always so close. The markets rely on a mystical combination of faith, confidence and patience. Meanwhile, the president is merely the leader of one branch of one of our governments. We’ve seen many times where a president´s agenda has been tripped up by Congress or the courts. Or sometimes, they’re simply overtaken by events.

    In 1981, Francois Mitterand, a Socialist, was elected president of France. Soon French money found a new home in New York. The franc dropped sharply, and it threatened to hurt the economy. Mitterand chose reality over his beliefs. That happens all the time.

    Let me be clear that government policy does impact the economy, and by extension, the stock market. But those policy decisions are usually well removed from the standard partisan debate. The government shutdown is a good example of a partisan effort that riled investors, but even that didn’t last long. Of course, what the Federal Reserve does is important, but that’s rarely an election issue. Plus, there’s no reason to think that a change at 1600 Pennsylvania Avenue will have a great impact on monetary policy.

    My advice is to resist the urge to make a market call based on your opinion of the president. The market truly doesn’t care. Instead, focus on strong companies going for good values. Now let’s look at this week’s economic news.

    The Economy Continues to Plod Along

    This week, we got more news suggesting that the U.S. economy is moving along, but at a weakly positive pace. On Thursday, the government revised Q2 GDP growth up to 1.4%. This is the seventh quarter in a row where GDP growth has been less than 2.6%. That’s not good.

    Of course, the second quarter has long since passed, and we’re not wrapping up Q3. At the end of October, we’ll get our first look at how Q3 did, and the number crunchers at the Atlanta Fed are forecasting growth of 2.8%. That would be very nice to see.

    fredgraph09302016

    I was very impressed by this week’s consumer-confidence report. Consumer confidence reached its highest level in nine years. That’s very good news, and the resilient stock market may be a reason. I suspect the housing market is playing a role as well.

    We also learned that initial jobless claims came in at 254,000. This number tends to bounce around a lot, so economists prefer to look at the four-week average. That number just tied its lowest reading in 43 years. In other words, the jobs market isn’t so bad, but next Friday, we’ll get the big September jobs reports. As much as I want to see the number of new jobs created, I want to see more improvement in wages. The trend here has started to turn positive, but we need more of it. More wages means more buying, which means more sales.

    Looking at the housing market, this week’s Case-Shiller report showed that home prices rose 5.1% in the last year. This is key, because housing is the wealth driver of so many Americans. Remember that the business cycle is to a certain degree the same thing as the housing cycle (here’s a good paper on that subject). This recent recession was different because so many homes were built during the bubble, and it’s taken some time for us to burn off the excess inventory. For now, the fundamentals of the housing market are quite solid. Now let’s turn to some recent news impacting our Buy List.

    Buy List Updates

    There hasn’t been much in the way of earnings lately, but that will change soon. The first Q3 earnings report will come out in two weeks.

    I was pleased to see shares of Wabtec (WAB) get a nice bump this week. The company apparently won approval from the EU for its merger with Faiveley. The EU had some anti-trust concerns, but Wabtec said they’d be willing to sell off Faiveley’s brake-pad unit. Shares of WAB had been in a slump, but they’re now close to breaking $80 for the first time since May.

    Barclays upgraded Signature Bank (SBNY) to overweight. This stock has been in a downtrend for some time. SBNY may be ready for a turnaround.

    big09302016a

    More bad news for Wells Fargo (WFC). This time, CEO John Stumpf got grilled by members of the House. He did slightly better this time, but I’m still holding to my belief that he needs to go. Stumpf agreed to forfeit $41 million in compensation, but that’s pocket change for him. If there’s a silver lining, it may lead WFC to break itself up, which would be good news for shareholders.

    Societé Generale initiated coverage of Cognizant Technology Solutions (CTSH) with a buy rating. Look for another good earnings report from CTSH next month.

    Some large investors are looking to take a big position in Hormel Foods (HRL), and they’re offering a low-ball price for the shares. I think it’s a bad deal, and the company agrees. Stick with Hormel.

    That’s all for now. Next week is the start of the fourth quarter. The ISM report will come out on Monday. The last ISM report was pretty weak. We’ll also get a look at auto sales. On Wednesday is the ADP payroll report, plus the ISM Services index. Then on Friday morning, get ready—the government releases the jobs numbers for September. Any strong number will almost certainly be used as evidence that the Fed needs to hike rates in December. 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