Here is the graph of monthly returns of Lennox International (LII) plotted against Vanguard S&P 500 Index ETF (VOO):
Exhibit 1: Monthly Returns of Lennox International and Vanguard S&P 500 Index ETF [June 2019 - August 2022
Here is the graph of monthly returns of Lennox International (LII) plotted against Vanguard S&P 500 Index ETF (VOO):
Exhibit 1: Monthly Returns of Lennox International and Vanguard S&P 500 Index ETF [June 2019 - August 2022
J.M. Smucker and Mondelez are consumer staples companies with similar financial performance. Both companies compete in similar product categories, especially when it relates to snacks. But, Mondelez has a vast international operation, while J. M. Smucker is more focused on the U.S. with very little So, I wanted to see if the mean daily returns are the same between the two stocks.
First, I downloaded the daily price return data for the past six months for both J.M. Smucker (SJM) and Mondelez (MDLZ) from IEX Cloud.
I did a correlation between the daily price returns of the two companies using R:
> cor(SJM_6Month_ClosingPrice_Daily_Return_Data$changePercent, MDLZ_6Month_ClosingPrice_Daily_Return_Data$changePercent)
[1] 0.5815403
The correlation in the daily returns between the two companies was 0.58 for the past six months. It is a positive correlation, but I would not consider this as a strong correlation in returns between the two companies. I would consider it a strong correlation if it was at or above 0.70. This came as a surprise given that both the companies are in the consumer staples sector and that sector has performed very well since December 2021.
Next, I wanted to calculate the p-value for the Welch two-sample t-test between means of the daily returns. The null hypothesis is that the difference in mean daily returns between J.M. Smucker and Mondelez is zero. The alternate hypothesis is that the difference is not zero. The p-value is 0.9035, which means the null hypothesis can be resoundingly rejected. The t-test command in R and the result set is presented below. The J. M. Smucker had a mean daily return of 0.0893% and Mondelez had a daily return of 0.0717%. There is a 1.7 basis points difference in returns with J. M. Smucker having a slightly larger daily return than Mondelez.
> t.test(SJM_6Month_ClosingPrice_Daily_Return_Data$changePercent, MDLZ_6Month_ClosingPrice_Daily_Return_Data$changePercent)
Welch Two Sample t-test
data: SJM_6Month_ClosingPrice_Daily_Return_Data$changePercent and MDLZ_6Month_ClosingPrice_Daily_Return_Data$changePercent
t = 0.1214, df = 239.4, p-value = 0.9035
alternative hypothesis: true difference in means is not equal to 0
95 percent confidence interval:
-0.002682718 0.003035099
sample estimates:
mean of x mean of y
0.0008936508 0.0007174603
Finally, here's the scatter plot of daily price change of J.M. Smucker (SJM) and Mondelez (MDLZ).
Aluminum and copper prices are a study in contrast. Aluminum is trading near all-time highs (See Exhibit 1: Aluminum Trading Near All-time High Price) while copper's rally is beginning to fade. Copper is trading at 5-week lows.
Exhibit 1: Aluminum Trading Near All-time High Price
According to Trading Economics, low inventory levels, the power crisis in Europe, and Ukraine-Russia tensions are all to blame for this incredible rally in aluminum.
Meanwhile, copper prices are at five-week lows due to the strong dollar and increased production. Trading Economics reports that Chilean authorities are projecting that copper production will increase by 4.1% during 2022, returning to pre-pandemic levels. Even at its current price of $4.32/lb, copper is trading at all-time highs (See Exhibit 2: Copper Prices at 5-Week Lows). I am watching copper see if it falls below $4/lb. Falling below that price level may be a bearing sign not only for copper but for the world economy.
Exhibit 2: Copper Prices are at 5-Week Lows
If copper continues to fall, the stock prices for miners, such as Rio Tinto (RIO), might fall with it. The share price of Rio Tinto has tumbled about 9% from its peak of approximately $78.48 achieved in mid-January (See Exhibit 3: Rio Tinto's Share Price Takes a Hit in January).
Exhibit 3: Rio Tinto's Share Price Takes a Hit in January
In a discussion hosted by Bridgewater Associates (the world's largest hedge fund), Daniel Yergin discussed the current energy transition, geopolitics, and government. Daniel Yergin emphasizes a few things about our energy transition:
Governments can offer subsidies, but the loss of revenue due to the subsidies need to be compensated by higher taxes, lower social benefits, or higher deficits. The world is grappling with excessive debt levels and does not have the flexibility to take on more deficit spending. Take the example of Japan, where the outstanding government bonds have crossed one thousand trillion yen for the first time.
You can watch the Daniel Yergin discussion on YouTube.Many people anticipate that electric vehicles will win the transportation race and replace the internal combustion engine. Many journalists and energy experts have been warning for a while that the transition from fossil fuels to renewables will be messy. Daniel Yergin says that we are in an energy-mix era.
Lithium - one of the critical materials used in batteries - is in short supply, and its prices have increased by 5x. Electric vehicle battery costs are set to increase for the first time in a decade.
Meanwhile, European Union is beginning to realize that they cannot simply abandon nuclear power and still keep the lights on. They plan to classify nuclear power and natural gas as "green" power sources. In my opinion, there is no such thing as fully green energy. For example, lithium mining and mining for other materials in producing an electric vehicle are damaging to the economy. The world needs good recycling technology to create a circular economy and minimize emissions and environmental damage.
General Motors Ultium Battery and Global Vehicle Platform for Electric Vehicles. (Source: General Motors) |
I recently wrote about my investment thesis for J. M. Smucker (NYSE: SJM) on Seeking Alpha. I have also written in the comments section about how selling a covered call on $SJM at current prices can boost overall investment returns.
J. M. Smucker's Has Timeless Brands, but the stock has run up a lot. (Source: J. M. Smucker) |
Nikkei Asia has published a fascinating article on how China cut public employees' paychecks. Many Chinese citizens are probably amazed and shocked to learn that some public employees make 200,000 yuan a year. Their paychecks are getting cut by about 25%. Cities in China were collecting revenue from land sales, but there are not many land sales with the indebted real estate market anymore.
Indonesia is grappling with more meddling from China in the South China Sea. China is trying to assert itself in Asia.
Note: Please pay for good journalism. When you support good journalism, you are keeping your freedom. Also, each day you will go to bed brighter. I read a lot of articles on Seeking Alpha every day. I subscribe to The Economist, The Financial Times, Barron's, Nikkei Asia, Bloomberg BusinessWeek, and The Wall Street Journal. I have a subscription to Seeking Alpha because I am a contributor on that site.
Fun Fact: Nikkei - a Japanese company - owns The Financial Times.
The Bureau of Labor Statistics does a world-class job of compiling the producer price index (PPI) across multiple industries and product groups. I wanted to better understand inflation from one category - Fruit and Vegetable Canning.
We know 2020 was a year like no other in world history. Demand slumped initially when the pandemic shut down the economy. But, the stimulus that was unleashed in the U.S. and across the world helped stimulate demand for products. The work-from-home trend added to the need for furniture and laptops. Comparing the producer price index between 2020 and 2021 may not accurately picture inflation. So, I have compared the change in the index between 2019 and 2021 for the fruit and vegetable canning industry. That shows a sharp increase in inflation (See Exhibit: Increase in Producer Price Index Between 2019 and 2021). The graph also shows the trend line and the equation. The slope for the change in PPI between 2019 and 2021 is 0.0037. The data used is for January to November for each year.
Exhibit: Increase in Producer Price Index Between 2019 and 2021 (%)
Oracle (ORCL) faced its first real challenge to its business model from Amazon AWS (AMZN). For a long time, Oracle's relational database has been the standard for many companies in the Global 2000. Oracle's database is still so entrenched in many corporations across the globe that they pay millions of dollars in Oracle license and support fees each year to keep the right to use their software. But, companies formed in the last 10-15 years have shunned the Oracle database. Instead, they have relied on myriad open-source database options and cheaper databases from other companies. The advent of AWS made it easy for any company to manage databases in the cloud.
Oracle has lagged behind the prominent three cloud vendors in offering infrastructure-as-a-service (IaaS). The company has a reasonably significant market share position in SaaS software, where it competes against the likes of Salesforce (CRM), Workday (WDAY), and SAP (SAP). But, Oracle is still heavily dependent on revenue from its database software. Since Oracle cannot attract new customers to its database, it has resorted to using its existing database install base as an annuity business. In essence, the Oracle database software generates much rental income from its remaining customers.
In the face of Oracle management's inability to innovate and compete, they have resorted to financial engineering to prop up their share price. A company innovating and competing well in the marketplace is most likely growing revenues. At the very least, revenue growth needs to keep up with GDP growth. Unfortunately, there is no revenue growth at Oracle. In the fiscal year ending May 31, 2011, Oracle had total sales of $35.622 billion. In the fiscal year ending May 31, 2021, Oracle had total sales of $40.479 billion. That equates to a 13.6% growth in revenue over 11 years. The 13.6% rate amounts to a compound annual growth rate (CAGR) of 1.16%.
Exhibit: Oracle Annual Sales Revenue from Fiscal Year Ending on May 31, 2011
How does a company show earnings per share (EPS) growth when revenue growth is nonexistent? Investors react positively to a growing EPS number. One way to show an ever-increasing EPS number is to repurchase the company shares and retire them. The repurchase transaction reduces the outstanding shares, and thus when stagnant net income is divided by outstanding shares, the resulting EPS number looks as if it is growing.
The company has spent billions of dollars each year repurchasing its stock. The company has spent $137.65 billion in repurchasing its shares in 11 years. Initially, the share repurchases did not do much to the stock price. So, in recent years, the company has gotten even more brazen in buying back its stocks (See Exhibit: Annual Amount in Billions Spent by Oracle on Share Repurchase).
Exhibit: Annual Amount in Billions Spent by Oracle on Share Repurchase
Paccar ( PCAR ) produced 185,900 trucks in 2022 and is on track for another record year in 2023. The company has experienced good revenue ...