CWS Market Review – July 19, 2022
Posted by Eddy Elfenbein on July 19th, 2022 at 4:23 pm

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Inflation-Phobia Stalks Wall Street

The stock market is still spooked by last week’s CPI report. Some observers thought we might see some cooling off of inflation. Well, that was not the case. Over the last year, inflation is running at 9.1%.

Inflation falls particularly hard on lower-income consumers and we’re already seeing it alter consumer behavior. According to the latest data, consumers are cutting back on purchases at the grocery store. Last month, for example, the price for a pound of white bread got to $1.69. That’s up 12% from last year. A pound of wheat bread got to $2.22, which is a record. In many parts of America, gasoline recently broke $5 per gallon, although it’s been drifting lower recently.

While inflation is tough for consumers, it also wreaks havoc on the financial markets. The data shows that inflation is fairly benign until it gets to about 5%. Above that, stocks start to feel the squeeze, and right now, we’re nearly double that rate. This is why everyone is on edge.

Following last week’s inflation report, there was a brief period where traders were expecting a full 1% increase from the Federal Reserve at next week’s FOMC meeting. However, the Wall Street Journal had a story over the weekend which said that a 0.75% increase is much more likely. As we know, the Fed pays close attention to inflation expectations. A recent survey of inflation expectations dropped to its lowest level in a year.

Still, that hasn’t calmed folks down. Despite the WSJ article, traders are currently placing 35% odds on a 1% hike. I doubt that will happen, but it shows how unnerved traders are. Even if we only get a 0.75% hike next week, we’ll probably get another 0.75% increase in September. Before the end of the year, it’s very possible that short-term interest rates will be 2% higher.

The higher rates are already having an impact. This morning, we got a report that housing starts fell for the second month in a row. Housing starts are now at a nine-month low. The bright spot, if there is one, is that homebuilders are still busy working down their backlog of unfilled orders.

The U.S. Dollar’s “Doom Loop”

Another side effect of higher interest rates is the soaring U.S. dollar. Recently, the dollar reached parity against the euro for the first time in 20 years. The dollar has also reached an all-time high against the Indian rupee. It also reached a high against the yen.

There’s even been talk of a possible “doom loop” involving the U.S. dollar. Simply put, that means that the strong dollar causes economic weakness which in turn leads to an even stronger dollar, which leads to more weakness. The cycle then repeats itself ad nauseam.

In normal times, that’s an easy cycle to break. The Fed would simply lower interest rates and weaken the dollar, but it can’t do that now with inflation heading toward 10% per year.

Here’s the Dollar Index. Notice how strongly it has rallied over the last year.

This angle gets more interesting because the European Central Bank meets on Thursday and is expected to raise interest rates for the first time in 11 years. The ECB’s President, Christine Lagarde, has signaled that the ECB will hike by 0.25%, but some economists think it will be a 0.5% increase.

The strong dollar is having an impact almost everywhere. Obviously, the Fed is keeping its eye on the foreign exchange market, but we’re seeing its impact within U.S. companies. While the dropping euro is great for U.S. tourists, it’s terrible news if you’re a big tech stock.

I’ll give you a perfect example. Yesterday afternoon, IBM (IBM) reported decent results for its Q2. For the quarter, IBM made $2.31 per share which was four cents better than Wall Street’s consensus. The company also said that it shut down its operations in Russia.

But neither of those issues were the big story. Instead, IBM said it expects to take a 6% hit to its revenues thanks to the strong dollar. That’s a big bite. IBM’s earlier projection had been for a hit of 3% to 4%. Q2 revenue was hit by $900 million thanks to the greenback. We’re talking about a $3.5 billion bite this year. Despite a good quarter, the dollar news dominated everything, and it’s likely to get worse. Shares of IBM fell 5.25% today.

This is just the beginning. The strong dollar is going to beat up several more tech stocks this year. We just don’t know yet which ones and how much.

Earnings Season Is Heating Up

This is also the start of earnings season. Only about 9% of the S&P 500 has reported so far, so it’s too early to draw any large conclusions. The “beat rate,” meaning how many firms have reported earnings better than expected, is running at 65%. That may sound good, but it’s well below the 77% rate that Wall Street has averaged over the past five years.

By the way, you read that correctly. Historically, a large majority of companies beat expectations, but those are the official expectations. The expected expectations may not be the same as the official expectations. Some companies are very skillful in managing what Wall Street analysts say. It’s all about expectations.

Wall Street had been nervous going into this earnings season. A recent survey by Bank of America showed wide-spread pessimism from investors. Recession expectations are at their highest levels since the pandemic.

Fortunately, many of the earnings reports we got today relieved investors. The dollar also fell some today which probably helped the bulls. The S&P 500 closed higher by 2.76%. This was the best day for stocks in nearly one month. For the first time since April 20, the S&P 500 closed above its 50-day moving average. That can often be a good omen, but I encourage you not to read too much into it.

The Nasdaq Composite also had a very good day. The index closed higher by 3.1%, but the really strong index today was the Russell 2000. The small-cap index rallied 3.5% today.

Here’s a great stat from Callie Cox: ten times this year, the S&P 500 has rallied more than 1% during the day only to finish lower on the day by the closing bell.

Shares of Johnson & Johnson fell over 1% today after the company beat earnings but lowered its guidance for the rest of this year. Lockheed Martin missed expectations, but the stock rallied 0.8% today.

In after-hours trading, shares of Netflix traded higher by 8%. The good news for Netflix is that it “only” lost 970,000 subscribers last quarter. Wall Street had been expecting a loss of two million. Once again, it’s all about expectations.

Tomorrow, we’ll get our first Buy List earnings report when Abbott Labs (ABT) releases its Q2 earnings report. The results will come out before the opening bell.

Previously, the company told us to expect full-year earnings of $4.70 per share. For Q2, Wall Street expects earnings of $1.12 per share. Not only am I expecting Abbott to beat Wall Street’s view for Q2, but I think there’s a good chance they’ll raise their full-year guidance as well.

Mueller Industries Soars 14.5%

In June 2021, I featured a small stock for you called Mueller Industries (MLI). Muller is one of those little stocks that’s virtually ignored by Wall Street. The company has a great long-term track record, yet no Wall Street analysts follow it.

Mueller is a leading manufacturer of copper, brass, aluminum and plastic products. This is a classic small-cap cyclical stock. Once you realize the scope of their business, you understand that the use of Mueller’s products is seemingly endless. Mueller makes everything from copper tubing and fittings to brass and copper alloy bars and refrigeration valves.

You can find Mueller most anywhere. Some of the companies that rely on Mueller are in sectors like plumbing, heating, air conditioning, refrigeration, appliance, medical, automotive, military and defense, marine and recreational. Mueller’s operations are located throughout the United States and in Canada, Mexico, Great Britain, South Korea, and China.

Mueller has about 5,000 employees and it’s based in Collierville, Tennessee. The company’s operations are divided among three divisions: Piping Systems, Industrial Metals, and Climate.

I bring up Mueller because the company released an outstanding earnings report. I can’t tell if it beat expectations or not because no one follows it, so there are no expectations. For Q2, Mueller made $3.65 per share. That’s up from $1.92 per share for last year’s Q2. Mueller has zero net debt.

The shares rallied 14.5% today. Over the last 30 years, Mueller is up more than 100-fold, and no one on Wall Street follows them. Sigh.

That’s all for now. I’ll have more for you in the next issue of CWS Market Review.

– Eddy

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Morning News: July 19, 2022
Posted by Eddy Elfenbein on July 19th, 2022 at 7:05 am

Indian Rupee Hits Weakest Level Ever Against the Dollar

Romania Warns Corn Exports May Slump as Drought Shrinks Harvest

Polish Households Face 180% Power Price Hike, Watchdog Warns

US Gasoline Prices Fall to Two-Month Low With Pump Pain Easing

How Joe Manchin Left a Global Tax Deal in Limbo

New Vatican Policy Orders Foreign Investment Accounts Closed

Yellen Calls for Trade Overhaul to Diversify From China

Banks’ Snubbing of Junk-Rated Loan Funds Worsens Financing Logjam

BofA Survey Shows Full Investor Capitulation Amid Pessimism

This Pioneering Economist Says Growth Obsession Must End

Housing Boom Fades World-Wide as Interest Rates Climb

Air Travel Is Broken. Here’s Why.

Who Will Blink First in the Battle for Control of Spirit Airlines?

GM Will Finally Have a Rival to Tesla’s Model Y With Blazer EV

IBM Second-Quarter Earnings Advance on 9% Sales Growth

Toys ‘R’ Us Is Coming Back. Soon, It’ll Be Almost Everywhere

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How AFLAC Hedges Currency Risk
Posted by Eddy Elfenbein on July 18th, 2022 at 11:02 am

AFLAC (AFL) gets about 70% of its income from Japan. This causes an issue for the company because that money needs to be converted to dollars for its shareholders.

The problem is that a large currency swing can wipe out its profits. Right now, the yen is at a 20-year low versus the dollar.

That’s why AFLAC hedges its currency risk. The WSJ had an article today taking a closer look at how the company goes about this. The company employs three strategies.

First, AFLAC’s Japanese subsidiary owns dollar-denominated assets. Conversely, the U.S. holding company owns yen-denominated debt. The third part is that the company buys forward contracts that let it convert yen to dollars at different prices and at different times. The contracts typically go out less than two years and are long the dollar and short the yen.

This helps AFLAC reduce its currency risk, but there’s always going to be some. For example, in Q1, the currency exchange pinged its earnings by six cents per share. That’s not so much.

The next earnings report is due out on August 1.

A Few Small Items
Posted by Eddy Elfenbein on July 18th, 2022 at 10:32 am

A few items to pass along.

Google (GOOG) split 20-for-1 today. This is the first split in the company’s history. The share price drops 95% but you now have 20 times as many shares. In 2004, the stock went public at $85 per share, which is $4.25 per share in split-adjusted terms.

The earnings “beat rate” this season is running around 60%. That’s below the 5-year average of 77%, but it’s still early.

Trex (TREX) said it will report Q2 earnings on August 8. Wall Street expects 67 cents per share.

Ross Stores (ROST) said that in June and July, it opened 21 Ross Dress for Less stores and eight dd’s DISCOUNTS® stores.

“These recent openings reflect our ongoing commitment to expanding our two chains,” said Gregg McGillis, Group Executive Vice President, Property Development. “This summer, we expanded our presence in our largest markets of California, Florida, and Texas, and also added locations in newer states, including North Carolina for dd’s as well as Ohio for Ross. Looking ahead, we remain confident in our ability to grow to at least 2,900 Ross Dress for Less and 700 dd’s DISCOUNTS locations over time.”

The Fed Is Leaning Towards a 0.75% Hike
Posted by Eddy Elfenbein on July 18th, 2022 at 10:04 am

The stock market is having a good morning so far. The S&P 500 is currently up 0.79%.

More banks are reporting earnings. This morning, Goldman Sachs said it made $7.73 per share. Wall Street had been expecting $6.58 per share. Bank of America made 73 cents per share. That was five cents below estimates.

Yesterday, the Wall Street Journal reported that the Fed will raise interest rates by 0.75% at its meeting next week. There had been some speculation that the Fed would go for a full 1% increase.

From the WSJ:

On Friday, a University of Michigan survey of consumers’ long-term inflation expectations fell to its lowest level in a year, which weakened the case for a 1-percentage-point rate rise. Fed officials keep a close watch on households’ and businesses’ expectations of future inflation because they believe such expectations can be self-fulfilling.

Market-based measures of future inflation have also drifted to their lowest levels since Russian President Vladimir Putin’s invasion of Ukraine in late February.

“They can take comfort from that,” said Laurence Meyer, a former Fed governor. “This takes the pressure off of them. I don’t think they want to go 100.”

Morning News: July 18, 2022
Posted by Eddy Elfenbein on July 18th, 2022 at 7:05 am

Economic War of Attrition Takes Toll on Russia, West

Europe Fears Economic Fallout if Russian Gas Outage Drags On

Recession Fears, Trade Shifts Whipsaw Global Grain Markets

Bread for $10 Is the New $5 Gas as Demand Wanes for Basics

Global Central Banks Ramp Up Inflation Fight

Why the US Dollar Is Booming and Creating a Possible Doom Loop

The US Is Exporting Inflation, and Fed Hikes Will Make It Worse

A Goldman Legend, Crypto Star and Top Banker Warn of Next Big Risk

Morgan Stanley Sees Stock Losses Even If There’s No Recession

The True Inflation ‘Crisis’ Is a Redefinition of the Word ‘Inflation’

Mexico’s Unicorns Unlikely to IPO Locally, Says Mexican Exchange CEO

Massive Wall Street Layoffs Feared As Banking Profits Tank

Diverging Jobs Data Raise Questions About Labor Market Health

Amazon C.E.O. Andy Jassy Breaks From the Bezos Way

Delta Buys 100 Boeing Max Planes, Its First Major Order with the Manufacturer In More Than a Decade

Bed Bath & Beyond Is In Crisis Mode. What Went Wrong?

China Weighs Mortgage Grace Period to Appease Angry Homebuyers

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The Market Breaks Its Losing Streak
Posted by Eddy Elfenbein on July 15th, 2022 at 1:32 pm

After five down days in a row, the stock market is having a nice rebound today. The S&P 500 is currently up over 1.6% as I write this.

As you might expect, the High Beta and riskier stocks are leading the charge. Some of the most defensive stocks like Hershey (HSY) and Church & Dwight (CHD) are down slightly today.

But the big winner today is Citigroup (C). Its shares are up over 12% thanks to a surprisingly strong earnings report. For Q1, the bank earned $2.19 per share. Wall Street had been expecting just $1.68 per share. That’s still a drop from the $2.85 per share the bank made in last year’s Q1.

Wells Fargo (WFC) is also having a good day. The shares are up about 6% after the bank reported earnings of 82 cents per share. That was a two-cent beat. A year ago, WFC reported earnings of $1.38 per share.

This morning, we got the retail sales report for June, and it was as expected. Retail sales rose by 1%. The Street had been expecting 0.9%. Excluding cars, the increase was also 1%. Wall Street was looking for 0.7%.

Morning News: July 15, 2022
Posted by Eddy Elfenbein on July 15th, 2022 at 7:02 am

China’s Surveillance State Hits Rare Resistance From Its Own Subjects

China’s Economy Hits a Slump as Covid Policy Takes a Toll

Euro Slips Below Dollar as Europe’s Economic Fortunes Slump

ECB Bond Aid Plan’s Fault Lines Exposed by Italy’s Political Crisis

Germany Hopes to Outrace a Russian Gas Cutoff and Bone Cold Winter

Energy Was the Only Bright Spot in the Stock Market’s Gloom

Manchin Crushes Biden’s Hopes for Revival of Economic Agenda

A Truly Massive Interest Rate Hike Is Now on the Table

People Have Money but Feel Glum—What Does That Mean for the Economy?

How to Get In on the Electric Vehicle Boom

Wall Street Texting Habit Sticks Banks With Rare $1 Billion Bill

Retail Sales Expected to Have Risen Amid Higher Inflation

Amazon Has Been Slashing Private-Label Selection Amid Weak Sales

Wave of Airline Flight Delays This Year Mostly Self-Inflicted

Tech Workers Long Got What They Wanted. That’s Over.

Would You Pay $40 a Month to Have Strangers Watch You Work?

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Morning News: July 14, 2022
Posted by Eddy Elfenbein on July 14th, 2022 at 7:04 am

Inflation Soared in June, Pinching Consumers and Challenging Policymakers

Dollar Gauge Hits Record High, Surpassing Pandemic Panic Peak

‘Don’t Fight It’: Hedge Funds, Wall Street Double Down on Dollar

Hot Inflation Report Puts Pressure on Federal Reserve

How to Invest When Inflation Is Bad and a Recession May Loom

Beware Wishful Thinking About Inflation and Recession

Why A 2022 Recession Would Be Unlike Any Other

The Housing Shortage Isn’t Just a Coastal Crisis Anymore

China Convenes Banks on Mortgage Boycott Roiling Markets

U.S. Electric Car Sales Climb Sharply Despite Shortages

Panasonic is Building the World’s Largest EV Battery Factory in Kansas

Russia Warns that G7 Attempt to Cap Oil Price Risks Higher Prices

Gas Prices, a Big Inflation Factor, Are Coming Down Sharply

ConocoPhillips to Acquire 30% Stake in Sempra’s Port Arthur LNG Project

Delta Predicts Travel Rebound Will Stretch Past Summer

JPMorgan Chase Says Second-Quarter Profit Fell 28% After Building Reserves for Bad Loans

Crypto Lender Celsius Files for Bankruptcy After Cash Crunch

Netflix With Ads Is Coming

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Inflation Rose Over 9% Over the Last Year
Posted by Eddy Elfenbein on July 13th, 2022 at 9:06 am

The June CPI report is out and it’s another strong one. Over the past 12 months ending in June, consumer prices rose by 9.06%. Wall Street had been expecting an increase of 8.8%.

The core rate rose by 5.92%. Wall Street was looking for an increase of 5.7%.

Over the last month, headline inflation rose by 1.3% while core inflation was up by 0.7%.

Energy prices surged 7.5% on the month and were up 41.6% on a 12-month basis. The food index increased 1%, while shelter costs, which make up about one-third of the CPI rose 0.6% for the month and were up 5.6% annually. This was the sixth straight month that food at home rose at least 1%.

Rental costs 0.8% in June, the largest monthly increase since April 1986, according to the BLS.

(…)

Much of inflation rise came from gasoline prices, which increased 11.2% on the month and just shy of 60% for the 12-month period. Electricity costs rose 1.7% and 13.7%, respectively. New and used vehicle prices posted respective gains of 0.7% and 1.6%.

Medical care costs increased 0.7% on the month, propelled by a 1.9% increase in dental services, the largest monthly change ever recorded for that sector in data that goes back to 1995.

Airline fares were one of the few areas seeing a decline, falling 1.8% in June though still up 34.1% from a year ago. The meat, poultry, fish and eggs category also fell 0.4% for the month but is up 11.7% on an annual basis.

The S&P 500 looks to open down 1.76%.