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Category: Chart of the Week

This Trend Practically Guarantees the Federal Reserve will Continue to Raise Rates

By John Del Vecchio

One of the hottest job markets in the U.S. is the trucking industry. Business is booming. A major shortage of drivers has led to a spike in wages as well as other perks such as signing bonuses. While trucking is hot, inflation is heating up too.

The underlying price pressures in transportation and logistics, as well as raw materials persist. The trend is strong and is a factor into why the Federal Reserve will likely continue to raise rates.

The change in pricing for the General Freight Trucking industry has rebounded and now growing by double digits.

Of course, this will start to be reflected in prices elsewhere as companies feel the pinch from higher delivery costs. This past earnings season we saw packaged food companies warn of higher transportation costs. Expect that to show up in your grocery bill in the near future!

3 Steps and a Stumble” Rule and Why Investors Should be Cautious

Famed market guru the late Martin Zweig noticed the market usually under performed dramatically over the years when the Federal Reserve raised interest rates three times during a given cycle.

Why?

  • Higher rates increase corporate financing costs, weakening earnings.
  • Rate hikes also increase investor margin expenses, which is particularly dangerous now when there has been a record amount of stock bought on margin.
  • The Fed raised rates in March and June this year following three rate hikes last year.

    The Fed says it will raise rates two more times in 2018.

    The chart from NDR shows when the 3 steps and stumble rule was followed by declines in the Dow Jones Industrial Average going all the way back to 1915.

    What does this all mean?

    The stock market could be overdue for a major downturn.

Bear Market? Bull Market? Tortoise Market

By John Del Vecchio

Of all Aesop’s Fables, the race between a slow tortoise and a fast hare might be the most classic.

The hare was so sure he’d win that he took a nap part way through the race. Meanwhile, the tortoise just plodded along.

In the end, the tortoise wins the race. It’s as simple as it is effective, with limitless applications.

The stock market is a pretty good one.

Over time, quality outpaces hype. Specifically, earnings quality. Companies reporting truly sustainable earnings outperform glossy growth stories over longer time frames.

It’s a marathon, not a sprint.

With the stock market at all-time highs, valuations stretched to the maximum, and an overly optimistic investing public, you might think that the hype-fueled stories are winning out.

After all, these are the types of stock stories that are easy to get sucked into.

They’re “revolutionary” and creating new markets. It makes for great conversation at summer barbeques – and you can brag about your recent winnings.

However, the exact opposite is happening. Names with quality balance sheets are winning out.

This is even more surprising given that programs like the Federal Reserve’s quantitative easing (QE) encourage excessive risk taking. That means companies might be rewarded by taking on more leverage to try and juice their returns on invested capital.

That quality is winning out – and by a wide margin right now – suggests some sanity in this record-breaking bull market.

This fact, combined with a recent decline in stock buybacks, means the market is setting itself up for one more big run.

Buybacks have been a key driver of stock performance since the lows in 2009. Recently, they’ve slipped, but patterns suggest they may start to tick back up.

If the blue line above were to follow the normal pattern, we should see an increase in buybacks over the next several weeks. Companies in the best position to buy back their stock have strong balance sheets.

The market is anticipating another boost from stock buybacks.

But not all buybacks are equal.

At Hidden Profits, we love getting paid first by the companies in which we’re invested.

Buybacks are one way to do that, but some companies use these repurchases to reduce share count and boost their earnings per share in low-quality ways. Management may finance the buybacks with debt while the business itself is underperforming.

Make no mistake: This is a way to take the shareholders’ eye off the ball.

Thankfully, investors are catching on by rewarding higher-quality companies.

This is our focus at Hidden Profits. My Forensic Accounting Stock Tracker (FAST) system adjusts for the shenanigans management may play with buybacks.

This fall, at the Irrational Economic Summit, I’ll highlight one of those hidden opportunities that has the ability to return billions of dollars to shareholders. It’s an interesting story about an equally disruptive company. I hope you can join me in Austin, TX, from October 25-27!

Good luck out there,

Originally published in The Rich Investor.

Why You Should Worry About Insiders Selling Stock as Stock Buybacks Explode

Corporate insiders are selling stock at increasing levels this year ($17.5 billion in May and June, according to TrimTabs Investment Research). As the same time corporate buyback announcements are at record levels, averaging $5.1 billion daily this year, far greater than the previous record of $3.2 billion daily in 2007. Is this a case of insiders violating their fiduciary responsibility by using corporate cash to enrich themselves by engineering stock price increases and artificially boosting earnings via buybacks? That’s a question the SEC is asking. What’s also worrisome about this phenomenon is that the insiders who are selling could well be signaling they have little confidence in future earnings growth. Which is why large insider selling often is a contrarian signal; and buybacks a temporary bandage.  Take Harley Davidson (HOG), which used a debt offering to buy back stock. It didn’t work. Its stock has dropped 20% amid fiscal disarray, and more recently retaliatory tariffs from the European Union.

Credit: SentimentTrader.com

Credit: TrimTabs.com

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