Showing posts with label Market News. Show all posts
Showing posts with label Market News. Show all posts

Sep 11, 2019

Market News: Morgan Stanley Sees 4 Stocks With Big Upside Even at Market's Peak

By Mark Kolakowski

Many market watchers believe that stock valuations are stretched, given that the S&P 500 Index (SPX) has surged by about 340% from its bear market low in March 2009, and traded today just about 2% below its all-time high. Nonetheless, despite their generally bearish outlook on the market, Morgan Stanley recently found 4 stocks that still have the potential to rise by up to 35%, giving them overweight ratings as a result.
These stocks are The Boeing Co. (BA), Deere & Co. (DE), Ford Motor Co. (F), and Emerson Electric Co. (EMR). Morgan Stanley is optimistic about these stocks despite an environment in which "slowing growth and margin pressures keep us cautious on equities and we see downside risk should labor markets weaken," as they write in a Sept. 9, 2019 report, "U.S. Equity Strategy: Industrials: Strategy Sector Views + Analyst Stock Picks."

Significance for Investors

Summarized below are Morgan Stanley's comments on Boeing, Deere, and Ford.
Boeing: price target $500, or 35.3% above the Sept. 10 close. Boeing is their top pick in aerospace and defense. The grounding of the 737 MAX actually "creates a buying opportunity in a steady aerospace cycle." The main positives are expected upgrades to the 737 MAX, an A-rated balance sheet, and an "attractive valuation" given a projected 2021 FCF yield of about 10% and forecasted FCF growth of about 10-15% thereafter. The current forward P/E is about 16, per Yahoo Finance.
Deere: price target $177, or 7.9% above the Sept.10 close. Farmer sentiment is stabilizing, Deere's market share is rising, and a cost savings program should increase profit margins. Morgan Stanley forecasts EPS growth of about 10% in fiscal year 2020, and views the shares as attractively priced at about 14x estimated fiscal year 2020 EPS.
Ford: price target $12, or 27.4% above the Sept.10 close. The big positives are: restructuring actions, particularly in Europe; strategic actions, such as a partnership with VW, deconsolidating the Ford Mobility ride share division, and emerging plans for the electric vehicle market; and an enhanced product mix, with new SUVs, a new F-150 pickup, and exiting the lower-margin car market.
However, Ford's debt has been downgraded to junk bond status by bond rating agency Moody's Investors Services. The downgrade was announced after the close on Sept. 9, and Ford shares slid by 1.3% on Sept. 10, recovering after being down by as much as 5.2% during the day. "The Ba1 ratings reflect the considerable operating and market challenges facing Ford, and the weak earnings and cash generation likely as the company pursues a lengthy and costly restructuring plan," Moody's report says, as quoted by Barron's.
Ford still has investment grade ratings from S&P and Fitch, so its borrowing costs are unlikely to jump significantly, Barron's observes. "Ford still has more than ample liquidity, with $23 billion of cash on its balance sheet plus an $11.4 billion revolver," notes Dan Levy, an analyst with Credit Suisse, as quoted in the same article. Barron's notes that Ford's restructuring plan is nothing new, having been underway for some time.

Looking Ahead

Even given the positives cited by Morgan Stanley for these stocks, should the economy or the stock market suffer a deep decline, it may be difficult for them to swim against the tide. In such an environment, being down less than the market as whole would represent outperformance, but not a particularly desirable form of outperformance for most investors.

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Jun 24, 2019

News,I Market News I Why Safe Haven News,I Market News I Why Safe Haven Gold ETFs Are Soaring as Trump-Xi Trade Talks LoomGold ETFs Are Soaring as Trump-Xi Trade Talks Loom

By Matthew Johnston

Gold ETFs, widely regarded as safe havens when equities are expected to fall, are soaring in tandem with the precious metal itself even as stocks reach record highs. The SPDR Gold Shares ETF (GLD), VanEck Vectors Gold Miners ETF (GDX), SPDR Gold Minishares Trust (GLDM), iShares Gold Trust ETF (IAU) and the GraniteShares Gold ETF (BAR) have all taken off over the past month as gold reaches highs not seen since 2013, according to Barron’s.
One of the main drivers of the recent gold rush is the continuing uncertainty surrounding the U.S.–China trade war and the potential economic fallout. All eyes will be on U.S. President Donald Trump and Chinese President Xi Jinping as the two leaders are expected to meet at some point during the G-20 summit, which is set to kick off Friday in Japan. An unfruitful meeting could result in additional tariffs, adding further weight on global trade and equity prices, while providing gold, gold stocks and gold ETFs with a significant boost. 

What It Means for Investors

Investors tend to flock to assets considered safe havens when the economic outlook begins to darken and the downside risks to stock prices multiply. The ongoing trade conflict between the world’s two largest economies has been the main catalyst to that darkening outlook, as forecasts of economic growth and corporate earnings show signs of weakness.
Although gold is not the only available safe-haven asset, there are a number of reasons it’s attracting a lot of investor cash right now. Government and investment-grade corporate bonds are often seen as safer than equities. Bonds offer yield, but those yields have been at historic lows over the past decade.
Even one of the safest of safe assets, U.S. Treasuries, is looking less attractive after dovish comments made by the Federal Reserve at last Wednesday’s monetary policy meeting sent the benchmark 10-year Treasury yield below 2%, to levels not seen in several years, according to The Wall Street Journal.
Meanwhile, gold rallied as the prospect of looser monetary policy weakened the outlook for the U.S. dollar. A cheaper greenback is bad for dollar-denominated assets, making them less attractive. But it’s good for gold, whose price tends to move in the opposite direction as the dollar. It’s also good for assets tied to the strength of gold, like gold stocks and the gold ETFs that hold them.
The VanEck Vectors Gold Miners ETF has risen nearly 20% since the start of the year and over 23% in the past month alone. It contains shares of 46 major gold miners, including Newmont Goldcorp (NEM), Barrick Gold (GOLD), Newcrest Mining (NCM.Australia), Franco-Nevada Corp. (FNV), and Agnico Eagle Mines Ltd. (AEM).
The iShares Gold Trust ETF is up 9% both since the start of the year and over the past month. The fund tracks the price of gold through holdings of physical gold bullion in a trust, with each share of the trust representing one-tenth of an ounce of gold.

Looking Ahead

The performance of gold and gold ETFs will depend, in large part, on the outcome of future trade negotiations and whether existing tariffs are lifted or new ones are imposed. “Tariffs can be thrown around as an economic bomb for anything now,” Peter Boockvar, CIO at Bleakley Advisory Group, wrote in a note. “Gold is finally back above $1,300, and I’m shocked it’s not much higher.”
Having written his note at the end of May, Boockvar has less reason to be shocked with the price of gold now hovering around $1,400 an ounce. If the Trump–Xi negotiations turn sour and gold prices skyrocket, he might just forget he was ever shocked at all. 

May 31, 2019

News | Market News | Boost Mobile Deal: Amazon Said Access to Spectrum Essential

By Deborah DSouza Updated May 31, 2019

The latest news report about Inc. (AMZN) has left ordinary investors and industry experts equally puzzled. According to two unnamed sources speaking with Reuters, the e-commerce giant is interested in buying prepaid cellphone wireless service Boost Mobile from U.S. carriers T-Mobile US Inc. (TMUS) and Sprint Corp. (S).
A source added that the main reasons Amazon is considering a deal is because it can then use the combined company's (T-Mobile and Sprint are seeking regulatory approval for a merger) wireless network for at least six years and buy any wireless spectrum divested.
Boost is one of many mobile virtual network operators (MVNOs) reliant on Sprint, meaning it is a carrier that doesn't own any network infrastructure or spectrum licenses and resells minutes it buys wholesale from mobile network operators (MNOs). It has 7 million to 8 million customers, according to estimates from Cowen analysts cited by Reuters, and Sprint has promised to sell it to placate regulators.
Why Amazon is after a wireless network or spectrum is not clear and speculation online is abundant. Does Amazon want to sell phones? Does it want to be the fourth major mobile operator in the country? Does it want to control all the ways it deals with its customers? The possibilities are endless for a juggernaut like Amazon.
It's also good to remember that in 2017, The Wall Street Journal reported the company was interested in a wireless partnership with Dish Network Corp. According to sources, the idea was that Amazon, as a founding partner of Dish’s new wireless network, "could offer an option for Prime members to pay a little more a month for a connectivity or phone plan."

Amazon: Access to Spectrum Essential

Amazon spent a record $14.4 million on lobbying government entities in 2018, which was more than any other tech company. In 2017, it spent $13 million and it has spent almost $4 million in the first quarter of this year.
The lobbying records, from OpenSecrets, offer us some interesting insight. Amazon first mentioned "spectrum" and "broadband and spectrum" in its filings in 2017 and continued to do so in 2018. In 2018, the company also joined the Dynamic Spectrum Alliance, an organization that lobbies for laws and regulations "that will lead to more efficient and effective spectrum utilization" and counts Alphabet Inc. (GOOG), Facebook Inc. (FB) and Microsoft Corp. (MSFT) among its members.
“Our products and services are smarter, faster and more convenient because we have access to unlicensed wireless spectrum,” said Brian Huseman, VP of public policy of Amazon, in a statement at that time. “Access to spectrum is essential for the creation and growth of ground breaking, consumer-focused technologies and we look forward to working with the Dynamic Spectrum Alliance to ensure we maintain it.”
The company lobbied on a law that increases unlicensed spectrum available for mobile and fixed wireless broadband use. But it looks like it is now interested in securing its interests by owning spectrum. Especially since the advent of 5G internet will increase the demand for airwaves.
"Three words: wholesale transfer pricing," tweeted Microsoft Senior Director Tren Griffin about the deal. "The U.S. MVNO graveyard is populated with many who died from 'supplier bargaining power.'"

Source: Investopedia

Apr 25, 2019

What the Bears Are Getting Wrong About the Bull Rally

By Mark Kolakowski Updated Apr 25, 2019

As the bull market and the U.S. economic expansion age, the bears are increasingly worried. Taking issue with the pessimists is Tobias Levkovich, chief U.S. equity strategist at Citigroup. “Business cycles don’t die of old age; they are murdered by the Fed or some exogenous shock," he observed in a recent note to clients, as quoted by Barron's. Levkovich refutes four major claims by the bears, as summarized in the table below.
4 Things the Bears Are Wrong About
Source: Tobias Levkovich of Citigroup, as reported by Barron's

Significance for Investors

As noted above, Levkovich takes issue with the belief that the odds of a recession rise as an economic expansion lengthens. Legendary investment manager Bill Miller's recent letter to clients offers his own reasons why the bull market should be far from over. He also refutes the notion that expansions die of old age, citing the fact that Australia is in its 28th year of growth, while also noting several key areas of strength in the U.S. economy that do not appear to be on the verge of reversing.
On the impact of rising wages on profit margins, Levkovich writes: “Wages have not been the cause of margin declines in the past 35 years but fixed overhead cost absorption variances have been. If companies can push any rising employee expenses through to customers (which appears to be happening), the concern about profitability may be overstated.”
Regarding inflows into stocks, he notes that share buybacks have the main driver of demand for equities throughout the current bull market. “We are unsure that so-called retail flows are the driving force anymore as that view seems to be so 1980s and 1990s,” he observes. Per data from EPFR Global cited by the Financial Times, funds that invest in U.S. equities have registered two consecutive weeks of net inflows, the first time this has happened since early Sept. 2018.
“Valuation is regularly cited as a source of anxiety but low inflation allows P/E ratios to hover in the 18x trailing earnings range if history is any guide. Our normalized earnings yield gap analysis still augurs well for S&P 500 gains in the next 12 months with 88% probability," Levkovich asserts. Bill Miller makes a similar observation, arguing that equities are cheap compared to bonds.
While reported earnings for 1Q 2019 so far are beating analysts' estimates, the bears will point to the fact that revenue beats are lagging, as described in detail by MarketWatch. This worries those who see revenues as a more fundamental indicator of corporate health.
Nonetheless, upbeat corporate earnings reports have sent both the S&P 500 and the Nasdaq Composite indexes to new all-time record high closes on April 23, The Wall Street Journal indicates. It says that "expectations may have been lowered too much" ahead of the reporting season, and adds that corporate guidance for the rest of 2019 is trending upwards.

Looking Ahead

The debate between the bulls and the bears is never-ending, and each side marshals facts to support their case. Meanwhile, there is mounting evidence that big investors, the so-called smart money, are cutting their equity exposures, per another story in the Journal. Who is right remains to be seen.

Source: Investopedia

Apr 11, 2019

Market News | Uber finally releases filing to go public

Sara Salinas, Lauren Feiner

GS: Dara Khosrowshahi Uber sun valley
Uber CEO Dara Khosrowshahi at Sun Valley.
Drew Angerer / Getty Images
Uber released its long-awaited IPO prospectus. The company will list on the New York Stock Exchange under the symbol “UBER.”
The company has self-reported unaudited financials for several quarters — one of the few tech giants expected to debut this year to do so. That means the public S-1 serves less as the typical first look into financials and acts more as a contextualized official record.
Uber reported 2018 revenue of $11.27 billion. The company posted net income of $997 million in 2018, but an adjusted EBITDA loss of $1.85 billion.
Uber reported a metric it called “Monthly Active Platform Consumers” or “MAPC,” which reflects “the number of unique consumers who completed a Ridesharing or New Mobility ride or received an Uber Eats meal on our platform at least once in a given month, averaged over each month in the quarter.” In Uber’s fourth quarter 2018, the company reported 91 million MAPCs, which was up 35% from the same quarter the previous year.
Uber also broke out trips and gross bookings on its platform. Trips represent “the number of completed consumer Ridesharing or New Mobility rides and Uber Eats meal deliveries in a given period,” rather than counting individual consumers. Uber said an UberPOOL ride with three separate customers paying would represent three trips, while an UberX ride with three passengers but just one paying customer would represent a single trip. In Q4 2018, Uber reporter 1.49 billion trips compared to 1.09 billion in Q4 2017.
The company defines gross bookings as the dollar value of ridesharing and new mobility rides, Uber Eats deliveries and amounts paid by shippers on Uber Freight. Gross bookings includes tolls taxes and fees but does not adjust for consumer discounts, refunds or tips earned by drivers. Uber reported $11.48 billion in gross bookings for its ridesharing business in Q4 2018 compared to $9.19 billion in Q4 2017. For Uber Eats, it reported gross bookings of $2.56 billion in Q4 2018 compared to $1.12 billion in Q4 2017.
The filing comes about two weeks after rival Lyft debuted on the public markets.
The two ride-hailing companies had been racing toward the public markets practically in tandem, though Uber’s offering is likely to be significantly larger, and one of the largest offerings this year. The company was previously reported to be seeking a valuation of up to $120 billion.
Uber’s self-reported financials for 2018 showed narrowing losses but slowing revenue growth.

Source: CNBC

Market News | 8 Stocks to Own in 2Q as the Market Enters Rough Waters

By Mark Kolakowski Updated Apr 11, 2019

Stocks are up sharply from their December 2018 lows, and many investors wonder if the best opportunities for gains in equities are now behind us. Meanwhile, David Kostin, the chief U.S. equity strategist at Goldman Sachs, has applied multiple screens to produce a basket of 30 stocks with strong prospects in 2Q 2019, including these eight: Amgen Inc. (AMGN), Facebook Inc. (FB), PayPal Holdings Inc. (PYPL), Foot Locker Inc. (FL), AT&T Inc. (T), Texas Instruments Inc. (TXN), VeriSign Inc. (VRSN) and The Western Union Co. (WU).
8 Stocks to Buy as Market Waters Get Choppy
(YTD Gains Through April 2, 2019)
  • Facebook, 34%
  • VeriSign, 26%
  • PayPal, 24%
  • Foot Locker, 22%
  • Texas Instruments, 21%
  • AT&T, 14%
  • Western Union, 13%
  • Amgen, 0%
  • Median S&P 500 stock, 17%
Source: Goldman Sachs, "Where to Invest Now: Strategies for 2Q," April 2019

Significance for Investors

Kostin's team looked for stocks in the S&P 500 Index (SPX) that already are included in at least two of four thematic baskets that Goldman believes are especially timely right now: low operating leverage, low labor cost, dividend growth, and high revenue growth. Each of these baskets has outperformed the S&P 500 in 2019, as detailed below.
Goldman Chose From These 4 Baskets
(YTD Gains Through April 4, 2019)
  • High Revenue Growth Basket, 20%
  • Low Operating Leverage Basket, 18%
  • Low Labor Cost Basket, 17%
  • Dividend Growth Basket, 16%
  • S&P 500, 15%
Source: Goldman Sachs
"The drag on sales from a slowing economy will be less for low operating leverage stocks given they have more stable margins due to higher variable costs as a percentage of revenue," Goldman advised in a previous report. Meanwhile, wages are rising rapidly, the result of general inflation, brisk job growth, and an unemployment rate at a 50-year low, leading Goldman to recommend stocks with low labor costs. The sections immediately below indicate which baskets include the eight stocks listed above.
Low Operating Leverage: Facebook, Texas Instruments, VeriSign, Amgen.
Low Labor Cost: Facebook, Texas Instruments, VeriSign, AT&T, Western Union, Foot Locker, PayPal.
Dividend Growth: Texas Instruments, Amgen, AT&T, Western Union, Foot Locker.
High Revenue Growth: Facebook, PayPal.
Amgen is representative of the fact that recent subpar performance does not exclude a stock from Goldman's forward-looking basket of 30. In fact, 16 of the 30 have generated YTD 2019 returns below that of the median S&P stock, and four of those are down YTD.
As noted above, this biotech company is in Goldman's low operating leverage (2.0% vs. 2.6% for the median S&P 500 stock) and dividend growth baskets (10% projected annual growth rate from 2018 to 2020, vs. 6% for the S&P 500 median stock). Amgen's dividend yield of 3.0% beats the 2.0% median for the S&P 500.
Although Amgen did not make the cut for the low labor cost basket, its implied labor costs as a percentage of sales are still below the S&P 500 median, 12% vs. 14%. The big weak point for the stock is that consensus estimates point to declines of 4% in sales and 5% in EPS in 2019. However, the company has a potential blockbuster in a drug for migraine headaches, which may generate annual sales of up to $3.5 billion, per research by RBC Capital Markets cited by MarketWatch.

Looking Ahead

If the recent surge in the S&P 500 represents a dangerous speculative bubble, as some observers warn, even the strongest stocks are bound to swoon when it bursts.

Source: Investopedia

Mar 27, 2019

Market News | Yield Curve and Margin Debt Send Conflicting Signals

By John Jagerson Updated Mar 27, 2019

Major Moves

The U.S. Treasury yield curve has had an interesting month as it has slowly inverted from the belly of the curve outward toward the long end of the curve. The three-year Treasury yield – which is currently the lowest point on the yield curve – first inverted by dropping below the one-month Treasury yield on March 7.
The 10-year Treasury yield (TNX) took a few weeks longer but finally dropped below the one-month Treasury yield on Friday, March 22. Both the 20-year Treasury yield and the 30-year Treasury yield are still above the one-month Treasury yield, but at the rate we're going, we could see the entire long end of the yield curve inverted within the next month or two.
So why is an inverted yield curve important for the stock market? Why should stock traders care what bond traders are doing to the yield curve? In the past, inverted yield curves have been a forerunner for stock-market downturns. On average, it takes eight months for the stock market to peak and start moving lower once the Treasury yield curve inverts.
Of course, that is an average time frame, so a stock market downturn could come sooner or later than that. And just because something has happened over and over and over again in the past doesn't guarantee that it will happen again in the future, but this signal has a pretty good track record.
The reason that the inverted yield curve has such a good track record of foreshadowing market downturns stems from the fundamentals that drive a yield curve inversion. When investors are nervous about the economic outlook for the future, they tend to buy longer-term Treasuries to protect their capital. This increase in demand for Treasuries drives the price of Treasuries higher, which in turn drive the yield on Treasuries lower.
If investors are nervous enough, they will even buy longer-term Treasuries that have lower yields than shorter-term Treasuries just to lock in the yield for a longer period of time in the anticipation that the Federal Reserve will eventually be forced to start lowering short-term rates to combat an economic slowdown or recession.

S&P 500

The S&P 500 is doing a pretty good job ignoring the inverting Treasury yield curve for the moment. After slipping back below the key level of 2,816.94 last Friday, the S&P 500 managed to close above this level once again today – establishing a new higher low for the index in the process.
Like I said above, an inverted yield curve is a longer-term indicator that can take more than a year to play out, and right now, it looks like traders may want to take another swing at climbing back up toward the S&P 500's all-time high of 2,940.91.
Read more:

Risk Indicators – Margin Debt

One of the driving forces that has lifted the U.S. stock market higher in 2019 has been the fact that buyers have been borrowing more money to invest. Buyers provide the demand in Wall Street's supply-and-demand equation, and sometimes buyers have so much demand that they choose to borrow money to buy stocks.
Traders can borrow up to 50% of the purchase price of a stock, according to Regulation T of the Federal Reserve Board. This means that, if a stock costs $100, you only need to put up $50 of your own money to purchase the stock. You can borrow the other $50. Borrowing money to buy stocks is referred to as buying on margin, and the amount of money you have borrowed to buy stock is called “margin debt.”
Tracking the total amount of margin debt being used to buy stocks in the market can give you a good sense not only of how much demand there is on Wall Street but also how confident traders are. Confident traders tend to borrow more because they believe that they are going to see a strong return on their investment. Nervous traders tend to borrow less because they are concerned that they could amplify their losses.
Margin debt reached an all-time high of $668,940,000,000 in May 2018 before it started to level off in mid-2018. By autumn 2018, margin debt had started to crater, dropping to $607,645,000,000 in October and then bottoming out at $554,285,000,000 in December. Not surprisingly, this drop in margin debt coincided with the bearish pullback in the S&P 500. When traders start selling positions to reduce their margin debt levels, the stock market doesn't have much of a choice but to move lower.
However, since December 2018, margin debt levels have begun to rebound. Margin debt climbed to $568,433,000,000 in January and – according to newly released data from FINRA – to $581,205,000,000 in February.
Unfortunately, FINRA releases its margin debt data a month behind. That's why we are just now seeing the data for February. We'll have to wait until the last week in April to see March's data.
Even so, the rebound in borrowing to buy stocks on Wall Street is an encouraging sign for the strength of the current uptrend. Plus, there is still plenty of borrowing that can be done before we reach the 2018 highs, which means there may be more upside for the S&P 500 so long as traders remain confident enough to borrow.
Read more:

Bottom Line – Mixed Messages

It can be frustrating when the bond market is sending one message by creating an inverted Treasury yield curve while the stock market is sending the opposite message by breaking back above key resistance and by increasing its margin debt. Typically in these cases, I have found it useful to take note of the warnings from the bond market but to trade based on the stock market.
Traders on Wall Street have an amazing capacity to climb the wall of worry. Prepare, but don't panic.

Source: Investopedia

Mar 11, 2019

Market News | 3 Key Brexit Votes This Week

By Daniel Liberto Updated Mar 11, 2019

Brexit is likely to be at the forefront of investors minds this week. In the next four days, British politicians will have their say on how and potentially when the U.K. leaves the European Union (EU).
By Friday, investors will find out whether Brexit will happen with or without an agreement in place by the March 29 exit date. There is also the possibility that the negotiation process gets stalled for a couple more months, potentially paving the way for another referendum.
The outcome of a series of votes promises to determine the fate of the world’s fifth largest economy, as well as the rest of the world and the global stock market. Here’s a breakdown of how this crunch week could pan out:

Vote 1: May’s Brexit Deal

On Tuesday, Theresa May will have another shot at getting her Brexit deal accepted by the House of Commons. The Prime Minister was humiliated in January when her Withdrawal Agreement, put together after months of tense negotiations with the E.U., was rejected in Parliament by 230 votes, the greatest defeat of a sitting government in the U.K.'s democratic history. She has since been seeking to renegotiate on that deal with E.U. politicians, hopeful that they will offer enough compromises to satisfy demands back home.
By Monday morning, just one day before the vote, Downing Street admitted that talks remain deadlocked. Negotiations continued over the weekend, although both parties are reportedly still nowhere nearer to agreeing how to prevent a hard border between Northern Ireland, which is part of the U.K., and the Republic of Ireland, which is part of the E.U. British politicians have been clear that they will reject May’s deal once again if this contentious issue isn’t resolved.
At present, May’s current deal is almost identical to the one that was rebuffed back in January. The Sunday Times predicted that it, too, will be defeated by a 230-vote margin, unless a substantial breakthrough occurs soon.

Vote 2: Leave Without a Deal?

If May’s revised Withdrawal Agreement is voted down, on Wednesday Parliament will be asked to decide whether the U.K. should give up negotiations and leave without a deal. A small group of British politicians are believed to favor this outcome, even though economists warn that it could lead to an economic recession both in Britain and potentially the rest of the world.
Supporters of a “hard Brexit” want the freedom to set up their own trade deals and rules. However, economists warn that leaving the customs union and using less favorable World Trade Organization rules before independent trade agreements are drawn up could destroy its economy, pushing up the cost of imported goods and squeezing consumer spending.
Lawmakers from the country’s political parties have also cautioned that the higher trade costs of a no-deal scenario must be averted at all costs. Those warnings should prevent the small group of politicians campaigning for a hard Brexit from getting their way.

Vote 3: Delay Brexit?

If, as expected, May’s proposal and a no-deal Brexit are rejected, politicians will get a third vote on Thursday. They will be asked whether Brexit should be delayed for a “short, limited” time, believed to be about two to three months.
The Article 50 negotiating period is due to automatically expire March 29. The European Council must give its approval to extend this date and would likely do so if asked to avoid the damaging impact of the U.K. leaving the E.U. without a deal.
Should the voting process reach this stage, another rejection is unlikely. If politicians didn’t want a no-deal Brexit, voting against delaying the process just days before the negotiation timeline is set to expire would make little sense, other than perhaps forcing May to resign.
Skeptics have questioned whether a couple more months would be sufficient, given that little progress on negotiations has been made since Article 50 was triggered nearly two years. If May survives after her second proposal is rejected, expect her to use this extra time to continue working on getting her deal over the line.
Meanwhile, opposing politicians will put forward their own proposals once again. Center-left Labor, the country’s biggest opposition party, is fighting to keep the U.K. in the E.U. customs union. Labor MPs have also called for the British public to have its say in another vote.
If Parliament rejects a no-deal Brexit and fails to quickly find an alternative solution that suits all parties, a second referendum may be the only course of action left. If the public votes yes to Brexit again, it’s back to square one. Alternatively, should the British electorate have a change of heart, Brexit would be scrapped indefinitely.

U.S. Stocks to Watch

Analysts have been warning that global stock markets have a lot riding on how, when and if Britain leaves the E.U. and caution that investors have yet to price these various risks into share prices. Over the next week, a number of U.S. stocks could see big swings depending on how votes play out.
Goldman Sachs identified 10 companies, Newmont Mining Corp. (NEM), Pembina Pipeline Corp. (PPL), Affiliated Managers Group Inc. (AMG), Willis Towers Watson PLC (WLTW), Invesco Ltd. (IVZ), News Corp. (NWSA), LKQ Corp. (LKQ), Bank of New York Mellon Corp. (BK), MSCI Inc. (MSCI) and CBRE Group Inc. (CBRE), that generate in excess of 15% of their revenues from the U.K.

Source: Investopedia

Feb 28, 2019

Market News | How to Profit Off a U.S.-China Stock Rebound

By Shoshanna Delventhal Updated Feb 28, 2019

Stock investors searching for how to profit off of a possible trade deal with China should look at three stocks that remain sharply low over the past year despite their recent rebounds. Stocks that are exceptionally well positioned to lead a rally in the U.S. equity market following a positive trade accord include vehicle stocks Brunswick Corp. (BC), Harley-Davidson (HOG), and Polaris Industries (PII). For these stocks, investors are at the moment “only modestly factoring in a favorable China trade resolution," which means that they have huge upside, according Wells Fargo’s Timothy Condor, per Barron’s.
3 China Plays
(YTD stock performance; % decline from 52-week high)
  • Brunswick Corp.; 13%, -24.5%
  • Harley-Davidson Inc.; 8.7%; -20.8%
  • Polaris Industries Inc.; 13.9%; -22.3%
(Source: Investopedia)

Trump Announces 'Substantial Progress' in Trade Talks

On Monday, trade-sensitive U.S. stocks rose on news that Washington will hold off on implementing the next scheduled increase in tariffs. Trump attributed the standstill to “substantial progress” in trade talks. A full-blown deal would remove additional tariffs imposed last year and call for no levy increases in the future, given China makes several promises, including buying more U.S. products, establishing a stable currency exchange rate, granting full access to Chinese markets and executing intellectual property protection. According to analysts at Bank of America Merrill Lynch, such a deal would boost S&P 500 stocks by 5% to 10%, and lift EPS by 1%, per Barron’s.

Vehicle Stocks Have Big EPS Upside

An easing in trade fears among investors this year has led shares of Brunswick, Harley and Polaris to outperform the market, all up over 8% YTD, yet still down as much as 25% from their 2018 highs.
Wells Fargo expects “the trade war with China will be resolved to some degree,” spelling more goods times for these three vehicle industry players. Condor rates all three at outperform, and highlights Polaris as particularly positioned to benefit given it has the greatest exposure to China. He sees as much as $20 per-share benefit to Polaris from a trade accord, and an incremental $1.60 per share in profit “if just the China portion of trade were resolved.” The analyst’s bullish forecast also factors in strong sales for side-by-sides and snowmobiles.
Harley could see a $3.70 per-share increase in light of a trade deal, according to Condor, while Brunswick could see an incremental $2.65 per-share value added to its stock.
Many market watchers have recommended more often cited stocks such as chip makers Intel corp. (INTC), Micron Technology Inc. (MU) and Nvidia Corp. (NVDA), and Broadcom Ltd. (AVGO), as well as smartphone maker Apple Inc. (AAPL), per an earlier Investopedia story. All of the aforementioned stocks derive more than 20% of their total top line from China. Other industries expected to benefit from a trade truce include beaten down energy and agricultural plays like Monsanto Co. (MON), Deere & Co. (DO) and Cheniere Energy Corp. (CHK).

Looking Ahead

It’s important to note that with huge upside potential for stocks such as Harley Davidson, there comes major downside risk if a China-U.S. deal falls through. In light of the fundamental issues facing Harley in the long-term, as displayed in its dismal quarterly earnings results posted in January, issues are likely to intensify without a trade deal. In the December quarter, the bike maker earned half a million dollars, or roughly zero cents a share, compared to the $0.28 EPS predicted by analysts polled by FactSet.
Ultimately, a partial deal with compromises seems more likely than a full-blown agreement. In this case, some market watchers expect little movement or a “sell the news” knee-jerk reaction, given that even this has been increasingly priced into the market with recent rhetoric from the White House, per Barron’s. On the other hand, in the event of a breakdown in a deal, in which a 25% tariff is ultimately imposed on all Chinese goods, 2019 earnings could come in 4.5% lower, per an HSBC estimate.

Market News | 6 High Margin Stocks To Lead As S&P 500 Sales Slow

By Mark Kolakowski Updated Feb 28, 2019

Against a background of decelerating GDP growth in the U.S. and across the globe, Goldman Sachs recommends stocks with high, stable profit margins and low operating leverage. They add that stocks with fast sales growth, until recently one of their favored investment themes, now are overpriced relative to the market. By contrast, stocks with low operating leverage are trading at a valuation discount.
"In the current macro environment, we recommend investors own stocks with low operating leverage and sell companies with high operating leverage," Goldman says in their latest U.S. Weekly Kickstart report. "Stocks with low operating leverage also have attractive fundamentals relative to stocks with high operating leverage," they add.
Among the 50 stocks in Goldman's low operating leverage basket are these six: Twenty-First Century Fox Inc. (FOXA), CBS Corp. (CBS), Hilton Worldwide Holdings Inc. (HLT), Starbucks Corp. (SBUX), Diamondback Energy Inc. (FANG), and TransDigm Group Inc. (TDG). This is the first of two articles that Investopedia will devote to that report, the second to come on Thursday afternoon.
6 Recession-Resistant Stocks
(Based on Low Degree of Operating Leverage)
  • Twenty-First Century Fox, 1.7
  • CBS, 1.8
  • Hilton, 1.6
  • Starbucks, 1.8
  • Diamondback Energy, 1.5
  • TransDigm, 1.3
  • Median stock in the basket, 1.7
  • Median stock in the S&P 500 Index (SPX), 2.6*
Source: Goldman Sachs; *excluding utility and financial stocks.

Significance for Investors

Goldman calculated each company's degree of operating leverage as (1) revenue minus variable costs, divided by (2) revenue minus both variable and fixed costs. In normal circumstances, the lowest possible value for the degree of operating leverage is 1.0, indicating that all the company's costs are variable.
Stated differently, companies with high operating leverage have costs that are largely fixed. As a result, when revenues rise, a large proportion of the increase falls directly to the bottom line. By contrast, companies with low operating leverage have cost structures that are quite variable, rising or falling in tandem with the amount of sales or the level of business activity.
However, in a period of economic slowdown when sales may be declining, the situation is reversed. Low operating leverage companies should endure less severe percentage declines in profitability since their expenses should fall as well. On the other hand, high operating leverage companies will have significant costs that remain despite the drop in revenue.
Comparing their basket of 50 low operating leverage stocks to their basket of 50 high operating leverage, Goldman finds the former to be attractive across several metrics. These are: a valuation based on forward P/E ratios that is 24% lower (15x vs. 19x); a median net profit margin that is almost twice as large (17% vs. 9%); and a median return on equity (ROE) that is more than 50% higher (29% vs. 18%).
Goldman notes that, since 2011, their basket of high revenue growth stocks has tended to outperform the S&P 500 in periods of sharply decelerating economic growth. However, they do not favor this strategy right now since these stocks are trading at 23% premium to the S&P 500 based on forward P/E (22x vs. 17x). Note that Goldman's P/E comparisons are affected by rounding.
Diamondback Energy is by far the standout in the basket, with projected growth in 2019 of 95% for sales and 30% for EPS. The median target price from 34 analysts covering the stock is $146, per CNN, which would be a 38% gain from the Feb. 27, 2019 close. Diamondback delivered earnings and revenue disappointments in 4Q 2018, but has issued guidance calling for a 27% increase in output in 2019, per Zacks Equity Research. Diamondback acquired rival oil exploration and production company Energen Corp. in 4Q 2018, which may be skewing the growth comparisons.

Looking Ahead

While Goldman's low operating leverage basket may outperform against the background of a slowing economy, it probably will not do very well if economic growth stabilizes and the bull market continues. Moreover, even in a slowing economy, its outperformance may consist of falling less than the broader market, rather than actually going up. Indeed, 19 stocks in the basket are projected to suffer declining sales in 2019

Source: Investopedia

Feb 25, 2019

Market News | Global Shares Climb After Trump Delays Tariffs

By Daniel Liberto Updated Feb 25, 2019

Global stock markets rose on Monday after President Donald Trump announced that the world’s two biggest economies are making progress on trade discussions.
President Trump previously pledged to hike tariffs from 10% to 25% on $200 billion worth of Chinese imports if an agreement wasn’t reached by Mar. 1. On Sunday, he tweeted that “productive” talks had led him to shelve those plans, adding that good progress had been made on a number of important issues, including intellectual property theft, technology transfers, agriculture, services and currency.
“I will be delaying the U.S. increase in tariffs now scheduled for March 1,” he said. “Assuming both sides make additional progress, we will be planning a Summit for President Xi and myself, at Mar-a-Lago, to conclude an agreement. A very good weekend for U.S. & China!”

Global Shares RIse

Investors cheered the news that a trade war, a trigger of slower global economic growth, might now be averted. At 6 a.m. EST, the MSCI All-Country World Equity Index, which tracks shares in 47 countries, was up 0.49%.
China's stock market had its best day in three years as the Shanghai Composite index entered bull market territory and surged 5.6%. Chinese shares were also helped by President Xi's statements about reforming the financial sector. Stock markets in Japan and Australia were also in the green with gains below 1%.
Strong appetite for equities in the east then spilled over into Europe. By mid-morning, the MSCI Europe was up 0.14% and Germany's trade-sensitive DAX index was 0.43% higher.
U.S. stocks are also expected to start the day in good form. Dow Jones Industrial Average futures were up 0.5%, S&P 500 futures gained 0.4% and Nasdaq-100 futures rose 0.5%.
Other asset classes were impacted by news of a potential trade resolution, too. In currencies, the yuan rose against the U.S. dollar, as did the Australian dollar, which is heavily linked to China commodity investments.
Spot gold rose slightly, and constructive trade talks also helped lift oil prices. International Brent Crude oil futures climbed 0.24% to $67.28 a barrel. An improving global economic outlook is good news for the sector, which has been buoyed in recent weeks by sanctions and political uncertainty tightening supply in key producing nations. Oil prices reversed after President Trump tweeted at 6:58 a.m. that they are getting too high and told OPEC to "please relax and take it easy."
Among the biggest exchange-traded fund risers on Monday were iShares China Large-Cap (FXI), VelocityShares 3x Long Crude linked to S&P GSCI Crude Oil Excess Return (UWT) and iShares MSCI Brazilian capped (EWZ).

Source: Investopedia

Feb 15, 2019

7 Stocks That Can Lead as Corporate Margins Plunge

By Mark Kolakowski Updated Feb 15, 2019

Corporate profit margins are under increasing pressure, as inflation and tariffs push up costs. In particular, an exceptionally tight labor market is causing wages to rise at an accelerating rate. "Stocks with the lowest labor cost exposure should outperform as wages continue to rise," Goldman Sachs says in their recent U.S. Macroscope report, noting that a "dovish Fed encourages strongest wage growth in a decade."
Among the 50 stocks in the low labor cost basket assembled by Goldman are these seven: Under Armour Inc. (UAA), Hanesbrands Inc. (HBI), ONEOK Inc. (OKE), Colgate-Palmolive Co. (CL), IPG Photonics Corp. (IPGP), Amphenol Corp. (APH), and Unum Group (UNM). This is the first of two articles that Investopedia will devote to Goldman's report.
7 Proven Leaders
(Labor Costs as % of Revenue)
  • Under Armour: 3%
  • Hanesbrands: 5%
  • ONEOK: 2%
  • Colgate-Palmolive: 6%
  • IPG Photonics: 12%
  • Amphenol: 12%
  • Unum: 5%
  • Median stock in basket: 6%
  • Median S&P 500 stock: 14%
Source: Goldman Sachs

Significance for Investors

Goldman's low labor cost basket is sector-neutral, with representatives from all 11 S&P 500 industry sector. Their methodology also has the effect of placing seven stocks in the basket of 50 that actually have labor costs as a share of revenue that are equal to or greater than the median for the S&P 500 as a whole. Additionally, note that Goldman's calculations are based on full year 2017 financial reports, given that full year 2018 data was not yet available for all S&P 500 companies.
Goldman cites the most recent survey by the National Association for Business Economists (NABE) as evidence of the increasing pressure on profit margins from wage increases. A record 58% of respondents report rising labor costs, but only 19% indicated that their companies had raised their prices to customers.
From early 2016 through mid-2018, Goldman indicates that their low labor cost strategy outperformed the S&P 500 by more than 20 percentage points, a period in which "breakeven inflation" rose from 1.2% to 2.2%. However, it underperformed by 7 percentage points in the second half of 2018, during which time market expectations about inflation and economic growth were declining. For the year-to-date through Feb. 8, 2019, the basket outperformed by 3 percentage points.
Going forward, Goldman expects the low labor cost strategy will continue to outperform, given their projection that the unemployment rate, which is already below most measures of theoretic full employment, will drop from its current reading of 4% to 3.6% in the second half of 2019. Their economists estimate that average wages are currently rising at an annualized rate of 3.4%, a high for this economic cycle.
Hanesbrands has been an especially strong performer in 2019, with its stock up 49% YTD. Its lengthy list of well-known labels includes, among others, Hanes, Polo Ralph Lauren, Champion, Playtex, Bali, Donna Karan, DKNY, Gear for Sports, Wonderbra, and L'eggs. Consensus sales and EPS growth estimates are just 1%, with a low forward P/E of just 10, per Goldman.
However, Hanes has been identified as an attractively-valued turnaround play by Seeking Alpha. The company is reducing a debt load that was added during a brand acquisition binge, is expanding international sales, particularly with its Champion label, and offers a safe dividend, per that report. The yield is currently 3.2%.
ONEOK, founded in 1906, operates natural gas pipeline and storage facilities, mainly in the U.S. Rocky Mountain and mid-continent regions. The stock is up by 25% YTD, and offers an attractive dividend yield of 5.3%. Based on strong "recession-resistant cash flows," ONEOK is poised to deliver long-term dividend growth while trading at a large discount to fair value, according to Seeking Alpha.
While ONEOK has a forward P/E of 23 times projected earnings, its PEG ratio, which compares the P/E to the projected growth rate in earnings, is only 0.61, per Thomson Reuters as reported by Yahoo Finance. This suggests undervaluation.

Looking Ahead

As long the economy and employment keep expanding, and the Fed remains dovish, labor costs are bound to continue rising, the low labor cost investment strategy will remain especially appropriate.

Feb 13, 2019

How Banks' $21 Billion Tax Bonanza Is Fueling the Stock Rebound

By Shoshanna Delventhal Updated Feb 13, 2019

U.S. banks, including the Big Six, reaped a windfall from the Trump tax cuts far greater than expected. A whopping $21 billion in tax savings, nearly double the IRS’s annual budget and greater than NASA’s request for 2019, has helped boost America’s largest financial institutions’ profits and stock prices, lifting the KBW Bank Index 14.4% YTD, compared to the S&P 500's 9.5% increase over the same period. Thanks to the Republican tax overhaul, banks on average saw their effective tax rates fall below 19% in 2018, compared to the approximate 28% they paid in 2016.
Four of the six largest U.S. banks paid less than expected in taxes last year. Bank of America Corp. (BAC) actually paid 18.6% in taxes, less than the 20% it expected. Meanwhile, Goldman Sachs Group (GS) paid just 16.2%, versus the 24% it expected, while Citigroup (C) paid 22.8%, versus the 25% expected, and Morgan Stanley (MS) was taxed at 23.5% versus the 20.9% initially forecasted. The tax cuts helped big banks finance $29 billion in dividends and buybacks to shareholders, and the six largest banks surpassed $120 billion in combined profits for the first time. Despite this major boost, banks still significantly reduced jobs and trimmed other expenses. Lending business growth also slowed over the period, per Bloomberg.

What the Big Six Banks Paid in Taxes

(Forecasted Tax Rate Vs. Actual Tax Rate)
  • Bank of America; 20%, 18.6%
  • Citigroup; 25%, 22.8%
  • Goldman Sachs; 24%, 16.2%
  • JPMorgan; 19%, 20.3%
  • Morgan Stanley; 23.5%, 20.9%
  • Wells Fargo; 19%, 19.8%
Source: Bloomberg

$21 Billion in Tax Savings for Finance Behemoths

Big banks, which in the past years have faced higher effective tax rates than non-financial companies, were among the biggest beneficiaries of the tax overhaul. While the companies promised to use a portion of the savings on things such as employee rewards and higher wages, community and small business support, the actual use of the tax savings is likely to spur a debate in Washington over the law’s effectiveness in boosting the broader economy.
There’s no question that tax cuts fueled dividends and buybacks for financial institutions. Bloomberg’s review, based on commentary from 23 U.S. banks and the Federal Reserve, indicated that the financial institutions increased their dividends and stock buybacks by an average of 23%. Wells Fargo increased its repurchases and dividends by $11.3 billion, trumping Morgan Stanley’s $1.8 billion increase, which was equivalent to the Veteran Association’s request for homelessness programs for FY2019.
Companies made gestures for employees, like Bank of America’s $1,000 bonuses for roughly 145,00 employees in 2018, and Wells Fargo’s new minimum wage at $15 per hour. However, the 23 banks slashed nearly 4,300 jobs, with a handful indicating thousands of additional job cuts to come. While tax cuts may ease pressure on personnel cuts due to changing industry dynamics and a shift to tech-enabled services, banks indicate that they are also spending a significant amount more on automation, per Bloomberg.
Some expect the impact of the tax cuts to continue to boost profits for the banks. In Q4, the tax break helped Citigroup post earnings per share well above the consensus estimate, yet fell short of revenue forecasts.

Looking Ahead

Positive drivers aside, it’s important to note that the bank rally may not last. Some market watchers, including Dan Nathan of Risk Reversal, warn that this is the beginning of the end for the financial sector’s comeback, per CNBC.
"I think we were all in agreement that the underperformance for all of 2018 was a really bad tell for this group,” wrote Nathan. The analyst highlighted other warning signs including the merger of SunTrust and BB&T to create the sixth-largest bank, noting that M&A activity in the space has historically acted as a downside precursor for the markets. Further, he sees the bond market flashing warning signs, spelling bad news for the global economy at large and banking stocks in particular.

 Source: Investopedia

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