TheChek News Flow

Stocks Keep Hitting Record Highs. Where to Find Values Now.

That’s not to denigrate the $6 trillion in paper wealth created in the U.S. equity market this year, according to Wilshire Associates’ sums. Or the Dow Jones Industrial Average’s 18.7% ascent in 2019, topped by the S&P 500’s 23.4% advance and the Nasdaq Composite’s 27.7% gain.

While the popular indexes hover at historic highs, significant shifts are happening in the markets. Investors have been moving away from “havens” that tend to benefit from economic weakness and bear markets. That trend most notably has been seen in long-term bonds and their equity proxies. And many sectors have been left behind, including value stocks and non-U.S. equities.

In the bond markets, there has been a steep rise in long-term yields across the globe. The stock of global bonds generating yields below zero has shrunk by nearly a third, to $11.9 trillion, from a peak of $17 trillion in late summer. In the process, government bond yields have jumped. The benchmark U.S. 10-year note’s yield has climbed to 1.94% from 1.47%, as the Federal Reserve has cut its federal-funds rate target twice, each time by a quarter of a percentage point. Yes, yields remain historically low. But the change is more important than the level, and what the change implies is more important still.

The trend is part of the general retreat from “risk off” assets, also apparent in the currency and metals markets. The Japanese yen and gold, two other havens, have slid. Meanwhile, the Chinese yuan has strengthened, falling below the psychologically key seven-to-the-dollar level. That’s an indication of optimism over the phase-one trade deal in the works between the U.S. and China. It reportedly would reduce previously announced tariffs on both sides, a major factor in the rise in stock indexes to records.

In the U.S. equity market, this shift from anti-risk assets is apparent in the price action of various exchange-traded funds. The iShares 20+ Year Treasury Bond ETF (ticker: TLT), for example, is down 9% from its peak, while Utilities Select Sector SPDR (XLU) is about 5% below its high.

The most fundamental reason for the shift out of risk-off mode is summarized succinctly in a client note from Cornerstone Macro, headed by Nancy Lazar: No recession is coming, and the global slowdown is over. Capital spending on productivity-enhancing software is growing more than is appreciated. Rising productivity, along with increasing labor-force participation, is expanding the economy’s supply side. And, finally, the headwinds from trade tiffs are abating, just as the lagged effect of monetary easing over the past year is kicking in.

Against this favorable economic backdrop, value stocks have never been so cheap relative to momentum stocks, according to Bank of America Merrill Lynch’s equity and quant strategy group, led by Savita Subramanian. The last time value stocks were this inexpensive was in 2003 and 2008, years in which they went on to outperform momentum stocks by 22 and 69 percentage points, respectively.

Given all this, if President Donald Trump succeeds in his goals of reducing the U.S. trade deficit and cheapening the dollar, while other policy officials lift bond yields and inflation, investors should buy foreign stocks and dump U.S. shares. That’s the provocative argument of Jim Paulsen, chief investment strategist at the Leuthold Group. The long underperformance of non-U.S. stocks “has made them unloved and underowned by most investors, and they now offer considerably cheaper relative valuations,” he writes.

Many investors have avoided venturing abroad via market-capitalization-weighted ETFs, which they fear could be laden with laggard foreign financial stocks. That’s another argument in favor of active management, which can remove the chaff and gather just the wheat offered in foreign markets.

Louis Camilleri, in his first interview since taking over, talks about the Formula 1 team, electric vehicles, and being a luxury marque

MARANELLO, Italy— Louis Camilleri’s appointment as Ferrari RACE -0.04% NV’s chief executive in July last year surprised many, including himself. Fifteen months on, his imprint on the Italian luxury sports car maker is becoming evident.

Mr. Camilleri is grappling with the rise of electric vehicles and the advance of autonomous-driving technology, while also seeking to return Ferrari’s storied Formula One racing team to success after a barren decade. On Monday, he laid out his plan to turn Ferrari into a luxury-goods brand that makes a range of products from apparel to leather accessories, a goal his predecessor, Sergio Marchionne, aspired to but failed to achieve.

After Mr. Camilleri’s appointment following the death of Mr. Marchionne, many in the car industry assumed he was a placeholder until a true successor to the charismatic Mr. Marchionne could be found. Mr. Camilleri, an outside director on Ferrari’s board, had worked for 40 years in the tobacco industry but never for a car maker.

Since taking over, the 64-year-old Mr. Camilleri has largely stayed out of the spotlight, shunning the media and commenting publicly about the business only during quarterly conference calls and once at the presentation of a new industrial plan.

Being a tobacco executive offered relevant lessons for running Ferrari, Mr. Camilleri said in his first interview since becoming CEO, because it involved “managing a company which is part of an industry going through major transformation and how to keep ahead of that transformation.”

Mr. Camilleri, a British citizen born in Egypt, was a business analyst in Switzerland for a chemicals company before joining tobacco giant Philip Morris International Inc. in 1978. He eventually moved to the parent company, which was renamed Altria Group in 1996, and remained until retiring in 2013. He was chairman and CEO of Philip Morris International from 2008 to 2013 and he remains a nonemployee chairman.

As Mr. Marchionne, CEO of Ferrari and the larger Fiat Chrysler Automobiles FCAU 1.12% NV, was dying, the head of the family that controls both car companies, John Elkann, asked Mr. Camilleri to take over as Ferrari CEO.

Mr. Camilleri knew the company well as a board member and because Philip Morris had been a key sponsor of the racing team since the 1970s. Mr. Camilleri was also a fan of the marque, having bought his first Ferrari, a 275 GTB, in 1977. He won’t say how many Ferraris he owns, but that “it’s a lot.”

The difference between Messrs. Camilleri and Marchionne became apparent at Ferrari’s Formula One team, the pride of the company and the testing ground for many technologies—like the steering wheel gear shift—that eventually make it into series production. Mr. Camilleri’s measured, soft-spoken style contrasts with the freewheeling and often-abrasive Mr. Marchionne, who would publicly criticize employees, an approach that led to high turnover at the racing team but failed to produce results.

Ferrari this season once again came up short against rival Mercedes, but the team won three races in a row for the first time since 2008, an improvement Mr. Camilleri linked to better moods.

“Mercedes has had a lot of stability, and we’ve had something of a revolving door,” Mr. Camilleri said. “People were afraid of taking risks because if they made a mistake they could get their head chopped off,” he said.

While all car makers are confronting the shift to electric vehicles and autonomous driving technology, the changes are particularly tricky for Mr. Camilleri and Ferrari because of the nagging doubts that people will shell out hundreds of thousands of dollars for an electric, self-driving Ferrari.

Electric cars have fewer moving parts than a vehicle with an internal combustion engine, potentially making it harder for Ferrari to showcase its engineering prowess, which has produced cars that can accelerate from 0 to 60 miles an hour in 2.4 seconds and can hit top speeds above 200 miles an hour.

“The perception is that the battery is a leveler; it’s up to us to be sure we can differentiate,” Mr. Camilleri said.

Ferrari has begun to dabble in hybrids—this year it released its first series production plug-in hybrid, the SF90 Stradale—and has set a target to have three of every five new Ferraris be hybrids by 2022. Mr. Camilleri said the first fully electric Ferrari should arrive between 2025 and 2030, with the precise date depending on the speed of technological advances.

At the time of Ferrari’s 2015 initial share sale, Mr. Marchionne argued that the strength of the Ferrari brand and the price of its cars meant it should be valued in the same way as luxury goods stalwarts like Hermès International SA, which have higher relative market values than car companies.

Since Mr. Camilleri took over, Ferrari’s stock is up more than 25%, and the company’s $31 billion market value is more than that of former parent, Fiat Chrysler, which last year generated 33 times more revenue and 10 times more profit. Fiat Chrysler made 4.8 million cars in 2018, compared with 9,251 for Ferrari.

To build up its credentials as a luxury consumer brand, Ferrari has commissioned Armani, the Milan-based fashion company, to oversee the production of Ferrari-branded clothing. Mr. Camilleri wouldn’t say what other consumer products he has in mind, only that they should be suitably high-end.

Ferrari doesn’t declare the size of its merchandise business, but financial analysts estimate it accounts for just a few percentage points of total revenue and profit. Mr. Camilleri forecasts selling products other than cars will generate 10% of Ferrari’s total profit within seven to 10 years.

Mr. Camilleri plans to terminate half of the licensing agreements and products that carry the Ferrari logo, which has proliferated on items ranging from key rings to coffee mugs. There will still be Ferrari key rings, Mr. Camilleri said, though they will be better made and higher priced. Products getting the ax include Ferrari-branded computers, credit cards and fragrances.

“These are products that have nothing to do with Ferrari and frankly dilute the brand,” Mr. Camilleri said.

Netflix, the current heavyweight, is in for a fight as Disney, Apple, AT&T and Comcast enter the ring this year and next

A new era is dawning in the entertainment world and you’re about to get a whole lot more choices—for better or worse. The streaming wars are here.

Titans of media and technology are wagering billions that consumers will pay them a monthly fee to stream TV and movies over the internet. Walt Disney Co. DIS 3.76% is launching a $6.99-a-month service next week, following Apple Inc.’s entry earlier this month. AT&T Inc. T -0.10% and Comcast Corp. CMCSA 1.10% ’s NBCUniversal next year will mount their own challenges to streaming juggernaut Netflix Inc.

The combatants are fighting on the same battlefield, all seeking to lure in subscribers, but they have radically different motivations—and some have far more at stake than others.

Legacy giants like Disney and AT&T’s WarnerMedia are racing to reinvent their core media business, which is under assault as consumers turn away from traditional broadcast and cable TV. For them, selling streaming subscriptions to consumers has to work—and has to be profitable. For Apple, while streaming can advance its business, failure is an option.

Consumers will have choices to make as new entrants join the fray: Americans are willing to spend an average of $44 monthly on streaming video and subscribe to an average of 3.6 services, according to a survey of over 2,000 people in recent days by The Wall Street Journal and the Harris Poll. That is up roughly $14 from what most people pay now.

But with so many existing players already in the market—Netflix, Hulu, Amazon Prime Video, CBS All Access and ESPN+, among others—not everyone can emerge victorious. “This market is going to have to shake out -- it doesn’t feel like all these players can continue to play this game forever,” said David Wertheimer, a former president of digital products at Fox Networks Group who is now a media and tech investor.

Netflix is in an enviable position with a big head start, but may be in for some turbulence. Nearly one in three Netflix subscribers said they would likely cancel the service in the next three months to make room for a new entrant, according to the Journal-Harris Poll survey. Some 43% of parents with kids under 18 said they were likely to cancel, as did 44% of men ages 18 to 34.

Their stated intentions may not translate into an actual cancellation. There are currently 158 million Netflix subscribers globally.

Netflix, like any subscription business, has regular customer turnover, and some of those who cancel eventually return. “Like the competition, polls come and go,” a Netflix spokesman said. “But years of experience have taught us that consumers want control over when and how they watch—and a wide choice of quality stories across every genre. And that’s what we’ve always focused on providing.”

Shots have already been fired, with Apple and Disney setting ultracompetitive prices and lavish spending by all parties to stock their services with the hottest programming, whether that is originals from a coveted producer or reruns of a 20-year-old TV classic. The explosion of options risks confusing consumers. Which service has the “The Office,” which has “Seinfeld” and which has “Friends”? How do you sign up?

“The next 18 months are going to be the most interesting in the history of the entertainment business—the grounds are shifting,” said Hollywood veteran Steve Mosko, chief executive of the production company Village Roadshow Entertainment, which is developing projects for multiple streaming outlets.

Franchises and Oldies

Disney surprised the media world with a low price for its Disney+ streaming service that is nearly half of Netflix’s most popular $12.99 monthly plan: Some 47% of survey respondents were likely to subscribe to Disney+. Many were especially enthusiastic about its big franchises—Star Wars and Marvel, for example—as well as its large catalog of children’s classics, from “Cinderella” to “Aladdin” to “Moana.” Disney acquired 21st Century Fox entertainment assets last year for $71.3 billion.

Disney is making a land grab for users now and worrying about profits later on—it expects to break even on the service in 2024. “They were brilliant thinking through the pricing. This is about aggregating consumers,” said analyst Michael Nathanson.

Disney’s direct contact with its customer base has come mostly through theme parks, Mr. Nathanson said, and the streaming service will allow “a deeper set of connections.” Disney could market its consumer products, cruises or theme parks to streaming customers, some media executives said.

A Disney spokeswoman declined to comment.

Hulu, which is now controlled by Disney, will become the home to more adult and edgier fare. Disney announced earlier this week that its FX Networks would also produce original shows for Hulu.

Comcast is taking a different path from its peers, reflecting its identity as not just a content owner, but as the country’s leading cable distributor. Peacock, the streaming service from its NBCUniversal unit, is set to launch next April, featuring a bevy of classics like “The Office,” “Frasier” and “Cheers,” plus originals from talent in NBC’s stable. An ad-supported version will be free to people who subscribe to Comcast’s cable TV or broadband services. If the company can reach deals with other cable providers, it could be free to their customers, too.

To some observers, that suggests Comcast wants to protect a traditional cable business that is still lucrative, even if cord-cutting is siphoning customers gradually. “The streaming business puts them in a conflicted place,” said Gary Newman, a former chairman of Fox’s television group. “It’s hard to be in on streaming without being fully in on streaming.”

People close to Comcast said the company is deeply committed to the streaming business and is simply taking a different approach.

Comcast is debating various ways to sell Peacock to those who can’t get it through a cable provider. One idea is to offer a limited, free version with ads meant to draw users in—it might not have various hit shows or might limit the number of episodes available, people familiar with Comcast’s deliberations said. A second tier would charge a modest subscription fee and would make all content available, with ads, while a third tier would charge a higher subscription fee with no ads, the people said.

NBC’s prime-time broadcast shows now stream on Hulu. At launch, Peacock will be able to share much of that content, and in September 2022 NBCUniversal will be able to terminate the deal and have most NBC shows exclusively on Peacock, if it chooses, people familiar with the agreement said.

AT&T will be the last of the major entertainment companies to enter the fight, with its HBO Max service slotted for a May 2020 launch. Its biggest challenge: It will be at the top of the market at $14.99 a month.

HBO is in the name, and the service has its entire current and past lineup. But the goal is to have something much broader, for just about everyone—cartoons, superhero movies from the DC franchise (Batman, Superman, Wonder Woman), “The Lord of the Rings” movies, and one of the largest and most popular catalogs of re-watchable TV shows, notably “Friends” and “The Big Bang Theory.”

Some 41% of survey respondents said they would be likely to subscribe. But brand and service confusion might be an issue. The company will encourage people to switch from HBO Now, a different service offering just HBO programming at the same cost, over to HBO Max.

What about people who get HBO on TV? AT&T hopes to get them onto HBO Max by cutting deals with cable and satellite TV providers. If HBO Max pulls in all existing U.S. HBO subscribers, it would have some 35 million subscribers—and from there, would try to build on its base.

900 Million Reasons Why

Apple’s TV+ service, which launched Nov. 1, is part of a broader push into services—including subscriptions and credit cards—as it tries to offset declining sales of iPhones.

The tech powerhouse is charging $4.99 per month for TV+. Its biggest advantage is a base of over 900 million mobile phone users globally. Apple is building a TV ecosystem where it can sell you subscriptions to its own original programs on TV+, plus the ability to add on streaming services run by others—Showtime, HBO and CBS All Access, for example.

The glaring challenge is that TV+ has just nine shows at launch, and no library of past hits, putting a lot of pressure on the company to find a successful show in the early crop.

Other streaming services including Amazon have found it hard to create a hit out of the gate. “There is a lot of pressure on them because of the quality of Apple products,” said Francis Lawrence, an executive producer of “See,” an Apple show about a world where a virus has left mankind blind.

In addition to the giants, startup Quibi next spring plans to launch its own streaming service, which will be tailored to mobile phones and feature short-form content from Hollywood talent.

Six in 10 consumers think the new streaming options are a good development, according to the Journal-Harris Poll survey. Still, those who cut the cable TV cord to save money may very well find themselves paying as much by signing up to multiple streaming services, said TV producer Mike Royce, whose credits include “Everybody Loves Raymond.”

“It’s going to be cable again in five years, except it will be streaming services,” Mr. Royce said.

Price: $4.99 per month

Launch: Nov. 1

Identity: Would you like some new TV shows with that iPhone?

Portfolio overview: Apple is offering a handful of shows at a low price (or free for a year to those who buy a new device) as well as access to other programming platforms such as HBO and Showtime.

Total programming: Launched with nine programs and plans to drop several more and some original movies in coming months.

Originals of note: “The Morning Show,” starring Jennifer Aniston and Reese Witherspoon ; “For All Mankind”

Classic movies: none

TV to rewatch: none

Biggest asset: access to 900 million potential customers (Apple device owners)

Biggest risk: Apple won’t be able to lean on a library of past TV and movie hits. No pressure, Jen and Reese! Apple’s new shows are getting mixed reviews.

Price: $6.99/mo

Launch: Nov. 12

Identity: Darth Vader meets Elsa

Portfolio overview: TV and movie programming from across Disney’s brands, Pixar, Marvel and Star Wars, including originals and a deep library of animated classics

Total programming: 7,500 TV episodes, 500 movies

Subscriber target: 60 to 90 million by September 2024

Originals of note: Star Wars’s “The Mandalorian,” “High School Musical,” “Lady and the Tramp” remake

TV to rewatch: 30 seasons of “The Simpsons”

Movie classics: “The Little Mermaid,” “Aladdin,” “Frozen,” “Mary Poppins” and more

Biggest asset: built-in fan base for popular franchises

Biggest risk: Original programming doesn’t meet superfan expectations.

Price: Free for Comcast cable and broadband customers; subscription pricing not announced for non-cable customers.

Launch: April 2020

Identity: We are NOT the cable guy.

Portfolio overview: originals from NBC’s best-known creators, plus a big library of classics

Total programming: over 15,000 hours

Subscriber target: None disclosed yet.

Originals of note: “Battlestar Galactica” reboot; “Brave New World” featuring Demi Moore; comedy from Jimmy Fallon

TV to rewatch: “The Office,” “Parks and Recreation,” “Cheers,” “Everybody Loves Raymond,” “Brooklyn Nine-Nine”

Movie classics: “ET,” “Jaws,” “Back to the Future”

Biggest asset: rich library of classic programming

Biggest risk: Being late to the game; motivating customers to drop Comcast’s traditional cable service.

Price: $14.99/mo

Launch: May 2020

Identity: It’s not HBO. It’s...HBO Max!

Portfolio overview: all HBO content; collection of programs and movies across Warner Bros. and cable networks including TNT, TBS and Cartoon Network

Total programming: 10,000 hours

Subscriber target: 75 to 90 million by end of 2025

Originals of note: “College Girls,” a comedy from creator Mindy Kaling; “Strange Adventures,” a DC superhero anthology from producer Greg Berlanti

TV to rewatch: “Friends,” “The West Wing,” “The Big Bang Theory”

Movie classics: “Casablanca,” “When Harry Met Sally”

Biggest asset: the HBO brand

Biggest risk: Consumers may find the price too steep; will shows like “Big Bang Theory” and “Friends” fit easily under the HBO brand?

Price: $12.99 for most popular tier

Launch: streaming since 2007

Identity: Catch me if you can.

Portfolio overview: With a vast library of TV shows and movies and a growing number of popular originals, Netflix doesn’t want to replace one channel. It wants to replace them all.

Total programming: 1500 TV shows, 4000 movies

Subscribers: 158 million world-wide

Originals of note: “Stranger Things,” “The Crown,” “The Irishman”

TV to rewatch: “Breaking Bad,” “Mad Men” and, coming soon, “Seinfeld”

Classic movies: “Rebel Without A Cause,” “Rocky”

Biggest asset: A giant head start

Biggest risk: Lower cost rivals eating into its subscription base; programming costs rising.

Price: $5.99 with limited ads; $11.99 with no ads; $44.99 for 60+ live channels as well as ad-supported Hulu

Launch: 2008

Subscribers: 28.5 million paid subscribers; majority owner Disney projects 40 million to 60 million subscribers by fiscal 2024.

Identity: Disney after dark

Portfolio overview: Primarily adult dramas and comedies that are too risqué for family-friendly Disney+ or just aren’t a good fit.

Total programming: more than 86,000 TV episodes and 2,000 movies

Originals of note: “The Handmaid’s Tale,” “Castle Rock,” “Shrill,” “The Act” and “Little Fires”

TV to rewatch: “This Is Us” “Lost,” “ER,” “Rick and Morty”

Movie classics: “Hoosiers,” “Mrs. Doubtfire,” “Fatal Attraction”

Biggest asset: Only streaming service that offers live TV and on-demand all in one place.

Biggest risk: Its strategy gets muddled under Disney’s control. It recently lost bidding wars to keep reruns of “Seinfeld” and “South Park.”

Price: $8.99/month, or included for those who pay $119/year for Amazon’s Prime shipping service.

Launch: Streaming since 2011

Identity: Thank you for purchasing the book. Would you like to see the movie?

Portfolio overview: A growing slate of originals, plus a huge library of older shows and movies. The tech company’s video offerings are like the rest of the site: labyrinthine.

Total programming: Amazon doesn’t disclose this statistic. A Barclays 2016 report estimated Prime Video had over 18,000 movies and nearly 2000 episodes of TV shows.

Originals of note: “The Marvelous Mrs. Maisel,” “Jack Ryan”

Classic movies: “True Grit,” “To Catch a Thief”

TV to rewatch: “Family Ties,” “Roseanne”

Biggest asset: Amazon Prime has over 100 million members, a huge potential audience.

Biggest risk: Dabbling in entertainment when its competitors are going all out against each other.

Price: $5.99 (with limited commercials), $9.99 (commercial free); both include live stream of CBS network

Launch: 2014

Identity: This isn’t your father’s streaming service … really!

Portfolio overview: a large library of current and older TV shows, a smattering of movies and a growing number of originals

Total programming: 12,000 TV episodes; currently 36 movies

Originals of note: “The Good Fight,” “Star Trek: Voyager,” “The Twilight Zone”

Classic movies: “An Officer and A Gentleman,” The Graduate,” “Moonstruck”

TV to rewatch: “The Brady Bunch,” “Cheers,” “Frasier,” “I Love Lucy.”

Biggest asset: experience, having been in the market for years

Biggest risk: Being able to keep pace with bigger competitors while also providing programming to Netflix and other streaming rivals.

Long-sought $2tn price tag for largest IPO leaves some investors in doubt

Saudi Arabia has been pulling out the stops to entice potential investors in the stock market flotation of its state energy giant, in what could be the world’s biggest ever listing.

From changing royalty payments, cutting tax rates and reducing long-term capital expenditure to ensuring a minimum dividend of $75bn for shareholders, the kingdom has sought the highest possible valuation for Saudi Arabia’s main revenue source.

With earnings of $111bn last year, it dwarfs the profits made by Apple, the largest-listed profit maker in the world. It makes rival ExxonMobil’s net income of $20.8bn look paltry.

Crown Prince Mohammed bin Salman, for whom the listing is at the heart of economic reform plans, has long sought a $2tn price tag which investors both at home and abroad have deemed too high, even for the world’s most profitable company.

While the heir apparent is said to have reduced his expectations in order to get the flotation over the line, people familiar with the matter have said there is still a big question over what the final valuation will be.

The kingdom seeks to sell 1 to 3 per cent of the company, hoping to raise $20-60bn through a listing on Riyadh’s Tadawul exchange.

Bankers are trying to encourage the country’s leadership to move towards a valuation of around $1.75tn even as some investors believe the company is worth less, somewhere between $1.2-1.5tn.

Bankers say domestic demand for the flotation has been stellar, with wealthy families in the kingdom pressured to buy a stake. One argument used by Saudi officials is that it is the patriotic duty of regular Saudis to buy in to the country’s crown jewel.

But overseas institutions have been wary about government interference in corporate strategy, governance issues and the inability of the kingdom to protect energy infrastructure after attacks on facilities in September.

The listing comes as oil companies have come under intense pressure to take responsibility for their role in enabling global warming. Not only is Saudi Aramco the largest oil producing company, the kingdom is the world’s biggest exporter.

Saudi Arabia believes that, in a world where oil prices structurally move lower as demand peaks in the years to come, its barrels will remain resilient given how cheap they are to produce and because of their low carbon intensity per barrel.

The kingdom seeks to be the last producer standing even as it invests in other sectors to try to diversify its economy — from mining to technology and tourism in order to future-proof the kingdom.

But, for now, oil prices matter. Crude sales to foreign buyers provide the bulk of government revenues and the kingdom will seek to support oil prices going into the next meeting of Opec ministers which takes place right ahead of the IPO.

The news has been largely market-friendly since the start of October, and investors have responded by bidding up U.S. indexes to records.

U.S.-China trade negotiations are progressing toward a phase-one deal that might include both sides rolling back some existing tariffs. Economic data have shown the U.S. consumer remaining healthy, even if the manufacturing sector continues to display signs of weakness. The Federal Reserve has stayed accommodative, lowering interest rates three times this year and helping to un-invert the yield curve.

While there have been some high-profile misses, third-quarter earnings have broadly exceeded a relatively low bar. S&P 500 index earnings per share are on pace for 1% growth from the year-earlier period, according to Jonathan Golub, Credit Suisse’s chief U.S. equity strategist, versus expectations for a 2.3% decline going into earnings season.

This past week, the S&P 500 index climbed 0.8%, to 3093.08; the Dow Jones Industrial Average rose 1.2%, to 27,681.24; and the Nasdaq Composite increased 1.1%, to 8475.31. All three are at their highest-ever closing values. The S&P 500 has risen for five consecutive weeks—the longest such streak since February.

The march to new highs has pushed the S&P 500’s forward price/earnings ratio to 17.2 times, the richest ratio since January 2018. Excluding the dot-com bubble, the index has traded for 14.4 times the next 12 months’ earnings, on average, since 1986, according to strategists at Bank of America Merrill Lynch. That is roughly where the S&P 500’s P/E multiple was at the start of 2019.

If history is any guide, forward earnings estimates are likely to come down. The Wall Street consensus is calling for 8.8% growth in earnings per share in 2020. Applying the typical path of revisions, Golub predicts that the final figure will be closer to 4.8%.

A whole lot of good news appears to be already priced into the market, with stocks at nearly two-year-high valuation multiples. That suggests the next leg up for U.S. stocks might be harder to come by.

Should investors start shopping abroad? Some strategists think so.

U.S. markets have outperformed the rest of the world by 25% over the past two years, and where U.S. stocks look expensive, many foreign ones look cheap. Eurozone stocks trade for 13.8 times forward earnings, just a hair above their long-term average of 13. Japanese shares sport a 13.8 times forward P/E, versus their 19.8 times average.

Mislav Matejka, J.P. Morgan’s head of global and European equity strategy, recently recommended overweighting both European and Japanese stocks. An investor exodus over the past two years has made those markets particularly underexposed, and he sees the same forces that have helped push U.S. stocks to their recent records lifting other developed markets next.

Jim Paulsen, the Leuthold Group’s chief investment strategist, sees the U.S. dollar coming under pressure from low interest rates and a narrower trade deficit if trade tensions with China ease. That would support foreign stocks, which are worth more dollars when the currency declines.

“A more competitively priced (lower) U.S. dollar, as desired by the president, would likely help international stocks gain leadership over the U.S. stock market,” Paulsen says.

At the same time, central banks and bond yields in Europe and Japan are extremely supportive. The European Central Bank lowered its benchmark rate to a record low of negative 0.5% in October, and futures-market pricing implies more cuts over the next year.

Euro-zone inflation pressures are nowhere to be seen, and expectations of fiscal stimulus are rising. Japan’s central bank has hinted at lowering its key rate, currently at minus 0.1%. Euro-zone stocks’ dividend yield is 3.3%, while Japanese stocks yield 2.4%.

European and Japanese economies and companies would also benefit from receding trade tensions between the U.S. and China.

An improvement in global economic fundamentals, central bank support, attractive relative yields, and a return of sidelined funds are all opportunities to export U.S. stocks’ recent exuberance and close the recent gap.

The next 12 months will be key for truck, tractor, and bus maker CNH Industrial, which is splitting itself in two.

If the producer of Iveco trucks, Heuliez buses, and Case farm machinery improves profit-margin and earnings-per-share targets, its stock could get a boost when the company separates in 2021.

The shares have risen 38.5% over the past five years. But UBS predicts that they may jump almost 30%, to $14, from a recent $10.11; it rated the stock a Buy in a September note. In its assessment, UBS cited CEO Hubertus Mühlhäuser’s three themes, outlined at a recent capital markets day: unlocking value, delivering growth, and expanding margins.

J.P. Morgan analysts are somewhat skeptical of the growth strategy, setting a more modest price target of $11 for CNH, but they concede that “there is significant upside to earnings from cost reductions and market outperformance if it can regain some market share, especially in European agriculture.”

CNH Industrial, which has a dual listing (tickers: CNHI and CNHI.Italy) on the New York Stock Exchange and in Milan, disappointed with third-quarter earnings on Nov. 5 that showed net sales of $5.9 billion, 6% below the level in the same period last year. It trimmed its forecast for full-year revenue for a second time this year, blaming currency swings and lower sales.

The company posted $2.1 billion of earnings before interest and taxes, or Ebit, for 2018, which had been adjusted for restructuring costs. Total revenue was $29.7 billion. J.P. Morgan forecasts that adjusted Ebit could rise to $2.6 billion for 2021 if the company delivers growth in the agricultural business and boosts market share in the European Union. The stock fetches 12.3 times this year’s expected earnings, a price/earnings ratio 10% below its peers’.

CNH is controlled by Exor (EXO.Italy), a holding company of Italy’s Agnelli family, which has interests in Fiat Chrysler (FCAU) and Ferrari (RACE). CNH produces and sells agricultural and construction equipment, trucks, commercial vehicles, and buses and has 66 manufacturing plants and 54 research-and-development centers around the world. It has a presence in 180 countries, employs 64,625, and has a market value $15 billion.

In September, Mühlhäuser announced a plan to split the business in a bid to “transform the company’s structure and performance.” One “off highway” company will be mainly an agriculture concern, with tractors and related vehicles contributing 75% of revenues; construction, 19%; and specialist products, 6%. This division would generate revenues of $15.6 billion, based on 2018 figures.

The second company will have a separate listing and contain “on highway” assets, including Iveco, Iveco Bus, and Heuliez Bus commercial vehicles. These will contribute 69% of its revenues; an industrial power-train business will account for the remainder.

Mühlhäuser tells Barron’s that the split will add value because, if “you remove the conglomerate discount, the sum of the parts are worth more than the value of the business.” He adds that the fastest growth will come from the agricultural business, driven by a recovery in the market that will give farmers more cash to upgrade machinery. The other half will be from initiatives, such as a $13 billion investment that CNH has made in technology to connect machinery so that useful agronomy data can be collected and sold back to farmers. Machines using this system could also give advance warning before parts need replacing—predictive maintenance that would create another regular income stream.

There was a report on Reuters Tuesday that Walgreens Boots Alliance, the big drugstore chain, is considering whether to go private in what would be the largest leveraged buyout ever. Its shares rose $1.56, or 2.6%, to $61.21 on the news.

There are obvious impediments to such a transaction, notably the amount of debt that would needed to finance a deal for Walgreens (ticker: WBA), which has a market value of $55 billion and about $16 billion of net debt. It’s now valued at about 10 times annual earnings before interest, taxes, depreciation, and amortization (Ebitda).

Berkshire Hathaway CEO Warren Buffett has been searching in vain for a large acquisition—what he has called an elephant—that could absorb a chunk of Berkshire’s (BRK.B) growing cash balance, which hit a record $128 billion at the end of the third quarter.

Walgreens is Buffett’s kind of company. It’s an easy-to-understand business that has an inexpensive valuation, trading at just 10 times projected earnings of $5.94 a share in the fiscal year ending in August 2020, a discount to the overall market’s price/earnings multiple of around 18. Berkshire could offer to pay $75 to $80 a share for Walgreens, or about $70 billion, in an all cash-deal or some mix of cash and Berkshire stock.

At such a price, the deal would be accretive to Berkshire, given the low yield the Omaha, Neb.–based company is now earning on its cash and equivalents, which are largely held in Treasury bills. At $70 billion, Berkshire could earn a 7%-plus return on its investment in Walgreens. Buffett, 89, is sensitive to prices, and has complained that an influx of money from private-equity firms has driven up the cost of corporate acquisitions.

“In the years ahead, we hope to move much of our excess liquidity into businesses that Berkshire will permanently own. The immediate prospects for that, however, are not good: Prices are sky-high for businesses possessing decent long-term prospects,” Buffett wrote in the Berkshire annual shareholder letter earlier this year. Without a major deal in recent years, Berkshire has plowed tens of billions of dollars into stocks like Apple (AAPL) and JPMorgan Chase (JPM).

Buffett refuses to participate in corporate auctions. That makes it difficult for Berkshire to make large acquisitions because corporate boards usually don’t want to negotiate with a single bidder.

One advantage of a potential deal like Walgreens for Berkshire is that the company’s large size may make it difficult for private equity to bid, outside of a club transaction in which multiple firms participate.

Walgreens has struggled lately amid pressure on its retail pharmacy business, and there are concerns that disrupters like Amazon.com (AMZN) could destabilize the industry. Reflecting this, the company’s adjusted earnings in its latest fiscal year ended in August were down 0.5% to $5.99 a share. The company’s guidance pointed to little change in adjusted earnings in the current fiscal year. The stock is down from a peak of nearly $100 in 2015.

Wall Street analysts are lukewarm on the stock, with only two of 25 giving it a Buy rating or the equivalent, according to Bloomberg. In a recent client note, J.P. Morgan analyst Lisa Gill called the company a “show-me story.” She has a Neutral rating on the stock. “Growth will be constrained in the near term, based on the difficult retail pharmacy backdrop, limited benefit from partnerships, incremental investments” and other factors, she wrote.

The company has been returning gobs of cash to shareholders, with a 3% dividend yield and a buyback of about 7% of its shares in the latest fiscal year.

Walgreens Boots isn’t perfect, but it’s the kind of company that probably appeals to Buffett and the price could be right. Now may the time for Buffett to act.

Richemont's Fashion Business: A Health Check

The Swiss luxury conglomerate has failed to turn brands like Chloé and Dunhill into a soft-luxury empire that can take on Kering and LVMH. Can recent operational changes turn the tide?

Richemont reported operating profit of €1.17 billion ($1.29 billion), below analyst expectations, as the market leader in watches and jewellery saw negative impact from the ongoing pro-democracy protests in Hong Kong. Net profit was down 61 percent in the period to €869 million.

Revenues in the segment which includes its fashion brands including Chloé, Dunhill and Alaïa, grew 1 percent in the period to €941 million, citing “mixed performance across the maisons.” (Richemont does not provide sales or profits of individual brands.)

“It has been a long time that investors have questioned the validity of the fashion businesses,” said luxury analyst Mario Ortelli.

And yet, Richemont remains committed to its soft luxury operations, underscored by a recent string of changes made at the group. Earlier this autumn Richemont’s head of fashion departed, and last week it announced that Chloé Chief Executive Geoffroy de la Bourdonnaye would leave the business: moves seen as part of a broader effort to boost Richemont's standing in the soft-luxury sector. Given that the group’s core competencies — jewellery and watches — have been threatened by macro trends (the decline of the watch business) and stiffer competition (especially if LVMH succeeds in its $14.5 million bid for Tiffany & Co.) a stronger fashion arm would take some of the heat off.

Below, BoF breaks down the current state of play at Richemont's fashion houses.

The conglomerate recently announced a joint venture with star designer Alber Elbaz, describing the project as “an innovative and dynamic start-up, meant to turn dreams into reality.” While the fashion industry awaits further details on the tie-up with anticipation, Richemont will have its work cut out for them to make it a financial success.

Launching a new fashion brand around a designer with no proven track record of attracting Gen-Z consumers is a risky and expensive proposition. Richemont’s expectations for the project seem to be contained. (The brand will be project-based and majority-owned by the conglomerate.) But, “it is unlikely that a start-up — even with a talented designer at the helm — can move the needle for Richemont’s fashion business,” Ortelli said.

Chloé, the largest and most relevant label in Richemont’s fashion portfolio, has felt the impact of two key departures this year: Eric Vallat as Richemont's head of fashion and accessories, and Geoffroy de la Bourdonnaye, who will be replaced as Chloé chief executive by former Maison Margiela CEO Riccardo Bellini. Richemont Chief Executive Jérôme Lambert described the management changes as “a key element for success,” adding on Friday's analyst call that Chloé “has [doubled] its turnover in less than five years.”

According to Morgan Stanley estimates, Chloé generated sales of €510 million —representing just 4 percent of Richemont’s group sales — in the fiscal year ending March 2019, although it was not profitable.

Natacha Ramsay-Levi, who joined Chloé as creative director in 2017 after a years-long partnership with Nicolas Ghesquière at Balenciaga and Louis Vuitton, has yet to produce a blockbuster accessory that would take the brand to the next level. Rumours have persisted she would soon exit the house, speculations the company denies.

“The identity of the collection under the creative leadership of Natacha Ramsay Levi is taking time to come across,” Ortelli said, also noting that Chloé is a gendered brand in an increasingly “gender fluid” market and at a time when it is hard for a mid-size fashion brand “to compete with the big gorillas in the room.” (Brands backed by the big fashion groups, LVMH and Kering, benefit from being able to tap into a vast retail real estate network — allowing them to scale their direct-to-consumer businesses faster — as well as bigger marketing budgets, which also aids in customer acquisition.)

One of Bellini’s first tasks will be to unlock the potential of Ramsay-Levi, whose current contract runs until March 2020, according to sources.

He will also be tasked with developing the brand’s accessories including leather goods, which currently account for approximately 60 percent of sales, as well as reduce its reliance on department stores. If Bellini can guide the label into stronger performances in key markets, “there is no denying that Chloé has good potential,” said Bernstein analyst Luca Solca.

The iconic label appointed Myriam Serrano as Chief Executive in September, but two years after the passing of the beloved designer, it has yet to articulate a plan for future growth, which will likely be rooted it its promising accessories business. Net sales were approximately €65 million in fiscal year 2017, according to Morgan Stanley estimates.

At some point, the company will also need to figure out how it plans to carry on creatively, whether that means hiring a new creative director to move the vision forward or continuing to rely on its vast archives for the time being.

British heritage label Dunhill's sales stood at €160 million in fiscal year 2019 and is likely unprofitable, according to Morgan Stanley Equity Analyst Edouard Aubin. Current Chief Executive Andrew Magg, who was brought in at the beginning of 2017 from Burberry, hired former Mark Weston as creative director, although his collections have yet to make significant headway on the menswear scene.

The real opportunity for Richemont’s fashion business could be in potential synergies with the group’s luxury e-commerce entity Yoox Net-a-Porter Group (YNAP). Lambert said that the first six months of the year have seen a further reinforcement of the link between YNAP and the rest of the group’s fashion activity.

Additional streamlining of the current portfolio after the shedding of Lancel last year seems unlikely, as do any further acquisitions. With LVMH soaring ahead of the competition, maybe a mega-merger between Kering and Richemont would be their best bet.

Tapestry and Capri have both struggled to form groups that can compete on a global scale.

NEW YORK, United States — Things are not going as planned for Tapestry Inc. and Capri Holdings Limited, the budding American fashion groups with ambitions to take on European rivals — and sector dominators — LVMH and Kering.

Both companies once again reported tepid results this week. Coach-owner Tapestry beat analyst profit projections, but weak results at Kate Spade New York, which the group acquired in 2017, disappointed. Sales at Stuart Weitzman, another acquisition, are also on the decline. The results came just two months after the dismissal of Tapestry Chief Executive Victor Luis. (Shares halved during his five-year tenure.)

Capri, the parent of Michael Kors, Versace and Jimmy Choo, missed earnings estimates, citing challenges in Hong Kong amid the continued protests.

It’s not just this earnings cycle, though. Tapestry and Capri may both want to be the world’s next major fashion group, but early efforts have proven that it's not going to be easy, if it's possible at all.

Their first challenge is positioning. Spoilt for choice, consumers are less interested in mid-priced products available at scale: they want dangerously affordable fast fashion or pure luxury. (And preferably at a discount.) It’s harder for consumers to see the value in something that is not cheap but not that expensive, either. Especially if it’s not utterly unique. That’s a problem for Tapestry in particular, which deals exclusively in accessible luxury.

When Luis first set out to build the group, he focused on operational improvements, whittling down wholesale partnerships and paring back markdowns. For Coach, this strategy has resulted in eight consecutive quarters of positive comparable sales, although that modest growth is coming from outside North America, where sales are flat.

With the acquisition of luxury brands Jimmy Choo and Versace, Capri has aimed to move upmarket, broadening Michael Kors’ high-end offering with hopes of relying less on the squeezed middle. It also closed some Michael Kors stores and pulled back on discounts in the wholesale channel. But the $2.1 billion purchase of Versace was expensive, and investors expect the Kors brand to throw off cash so that the company can put more money into scaling the Italian fashion house.

Investors seem unconvinced that either plan will work. Tapestry shares are down 20 percent in 2019, and Capri is down about 5 percent in the same period.

At Tapestry, the focus is on turning around Kate Spade, where global comparable store sales decreased 16 percent in the most recent quarter. But Kate Spade is not the only problem. While each of its three brands have strong DNA, the company has failed to produce a breakaway hit.

At Capri, Versace may be growing fast in the US and Europe, but those gains were offset in the most recent quarter by the hit the brand took in Hong Kong and mainland China. And net sales at Kors are still on the decline. Sales at stores open at least one year are up, though, which Chief Executive John Idol attributed to a return to core product that the brand’s fans love.

“We kind of made a mistake,” he said in the earnings call Wednesday, pointing to how Kors had pulled back from its signature items in previous quarters. “[Now] we’ve course-corrected and in our own retail we’ve seen some very strong selling that we’re extremely pleased with.”

Still, there is dissonance between Idol’s vision for Capri as a true luxury player versus Kors’ position in the market today as an accessible brand.

LVMH and Kering understand that they are building brands to last — and this requires considerable time and capital. To make it happen, they rely on marquee brands to fund the development of smaller brands. Louis Vuitton and Dior, for instance, drive significant sales — and profit — within the LVMH universe, generating enough to cash so that group is able to experiment with new ventures (like Rihanna's Fenty fashion line) and acquire other big players. (Most recently, it bid $14.5 billion to buy Tiffany.)

Tapestry and Capri need to cultivate their own version of Louis Vuitton in order to move forward— and satisfy impatient investors.