Did you miss yesterday’s post where I show how inflation impacts valuations and the three risk factors?
- profit risk: mainly tied to recession risk given current trends and tax reform. Low risk level currently.
- inflation risk: the Fed is totally focused on 2.0%+ inflation and openly willing to allow some overshooting. Inflation going from 1.8% to 2.5% reduces the Rule of 20 “fair P/E from 18.2 to 17.5, increasing the potential downside to fair value from 13.0% to 16.5%.
- confidence risk: this risk is now at its maximum given current confidence readings and rising interest rates. A confidence shake up could be nasty given that TINA is no longer in everyone’s mind as 2Y Treasuries flirt with 2.0% yields. Buying the dips may not be as “automatic”.
Yesterday’s post also included the December manufacturing PMIs. Here’s what was said of the trends in manufacturers’ selling prices:
- U.S.: “factory gate charges rose solidly”
- Eurozone: “December saw rates of inflation in output prices and input costs remain elevated (…) with average vendor lead times lengthening to one of the greatest extents on record.
- China: “prices charged increasing at a solid pace.”
Yesterday’s post was also an introduction to this morning’s TEN explaining the new ratings featured in the sidebar.
Yesterday, Thomson Reuters/IBES published its first tally of Q4 earnings releases and it is very strong:
16 companies have already reported their Q4 results. Eight are consumer companies, 6 technology and 2 industrials. The beat rate is 81% with a +7.0% surprise factor (+2.4% on revenues).
Trailing 12 months EPS have jumped from $128.22 to $131.78 as a result, a 2.3% gain. Full year 2017 EPS will surely exceed the current estimate of $131.47.
The S&P 500 Index jumped 0.8% yesterday but the Rule of 20 P/E dropped as EPS rose (yellow line):
- In 2017 the S&P 500 did not have a single monthly decline and has now risen for 14 months in a row. This has never happened before. How long can this trend continue?
Source: LPL Research (via The Daily Shot)
U.S. Bars Merger of MoneyGram, China’s Ant Financial An American national-security panel refused to approve a deal for China’s Ant Financial Services Group, an affiliate of Jack Ma’s Alibaba, to buy MoneyGram, in the latest sign the U.S. is tightening scrutiny of investment from China at a time of greater tensions between the two countries.
(…) In September, President Donald Trump blocked an attempt by Chinese government-backed Canyon Bridge Capital Partners to buy Portland, Ore.-based Lattice Semiconductor Corp. after CFIUS recommended against the deal.
Chinese conglomerate HNA Group Co. has been trying for some time to get approval from the panel to buy a controlling stake in SkyBridge Capital, the investment firm owned by former White House adviser Anthony Scaramucci. A $2.7 billion deal for China Oceanwide Holdings Group Co. to buy Richmond, Va.-based insurer Genworth Financial Inc. is also being held up by the committee.
The outlook for Chinese investment could get tougher yet if bipartisan bills introduced in November by Senate Majority Whip John Cornyn (R., Texas) and Rep. Robert Pittenger (R., N.C.) pass. The proposed legislation would further ratchet up scrutiny of foreign investment, taking aim in particular at Chinese technology deals. (…)
Ant-Moneygram’s Demise Spells the End for China-U.S. Deal Making CFIUS’s decision to block the proposed $1.2 billion deal shows that Beijing’s recent efforts to relax foreign investment rules aren’t going to meet with much reciprocity.