CWS Market Review
October 14, 2016
“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 few 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 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 the last jobs report will deter the Fed. I still think 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. 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 year. 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!