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Uncertainty and volatility to remain in place as we enter 2Q 2018

Uncertainty and volatility to remain in place as we enter 2Q 2018

1Q 2018 – A Return of Volatility and Uncertainty

Last week was not only a shortened week owing to the Good Friday market holiday, but it also brought a close to what was a tumultuous first quarter of 2018. The stock market surged higher in January, hit some rocky roads in February than got even more volatile in March. All told, the S&P 500 ends the first three months of 2018 in a very different place than many expected it would in mid-January. While the four major domestic stock market indices finished March in the black, the only one to finish 1Q 2018 in the black was the Nasdaq Composite Index. Even that, however, was well off its January high. What we saw was a very different market environment than the one we’ve seen between November 2017 and the end of January 2018.

As we begin April, we have China responding to the Trump Administration’s steel and aluminum tariffs with their own on a variety of U.S. goods and President Trump suggested he was ruling out a deal with Democrats on DACA. This likely means the uncertainty and volatility in the stock market over the last several weeks will be with us as we get ready for 1Q 2018 earnings season.

In my view, this should serve as a reminder that “crock pot cooking” does not work when applied to investing — rather than just fix and forget it, there’s a need to be active investors. Not traders, but rather investors that are assessing and re-assessing data much the way we do week in, week out.

Of course, our view is thematic data points, as well as economic ones, offer a better perspective for investors. In last week’s Cocktail Investing Podcast, Lenore Hawkins, Tematica’s Chief Macro Strategist, and I explain how the combination of thematic investing and global macro analysis are the chocolate and peanut butter of investing. Coming out of the holiday weekend, I am seeing several confirming data points for our Safety & Security investing theme in the form of the data breach that hit Saks Fifth Avenue and Lord & Taylor. According to reports, Russian hackers obtained “a cache of five million stolen card numbers.” This comes just a few days after Under Armour (UAA)  disclosed that an unauthorized party acquired data associated with 150 million MyFitnessPal user accounts.

During the quarter, we selectively added shares of Rockwell Collins (ROK) and Paccar (PCAR) to the Tematica Investing Select List and recently pruned Universal Display (OLED) and Facebook (FB) shares. The former two were selected given prospects for capital spending and productivity improvement in the country’s aging plants, while Paccar is poised to benefit from the current truck shortage as well as the increasing shift toward digital commerce that is part of our Connected Society investing theme.

With Universal Display, it’s a question of expectations catching up with the current bout of digestion for organic light emitting diode display capacity. We’ll look to revisit these shares as we exit 2Q 2018 looking to buy them if not at better prices, at a better risk-to-reward tradeoff. With Facebook, while we see it benefitting from the shift to digital advertising the current privacy and user data issues are a headwind for the shares that could lead advertisers to head elsewhere. Much like OLED shares, we’ll look to revisit FB shares when the current dust-up settles and we understand how Facebook’s solution(s) change its business model. In the near-term, the verbal CEO sparring between Facebook’s Mark Zuckerberg and Apple’s (AAPL) Tim Cook over privacy, trust and business models should prove to be insightful as well as entertaining.

 

The Changing Stock Market Narrative

The narrative that has been powering the market saw a profound shift a third of the way through the quarter to one of mixed economic data, uncertainty over monetary and trade policies emanating from Washington that could disrupt the economy, and now short-lived concerns over inflation. Recently added to that list are user data and privacy concerns that have taken some wind out of the sales of FAANG stocks. This is very different than the prior narrative that hinged on the benefits to be had with tax reform.

 

 

Perhaps the best visual is found in the changes to the Atlanta Fed GDP Now forecast (see above). The forecast sat at more than 5% in January before a number of downward revisions as a growing portion of the quarter’s economic data failed to live up to expectations. And as we can see in the chart, as the economic data rolled in during late February and March, the Atlanta Fed steadily ticked its forecast lower, where it landed at 2.4% as of March 29. To be fair, we will receive March economic data that could prop up that forecast or weigh on it further. We’ll be scrutinizing that data this week, which includes the March readings for the ISM Manufacturing and Services indices, auto & truck sales and the closely watched monthly Employment Report. We’ll also get the last of the February numbers, namely the Construction and Factory Order reports.

As we digest the ISM reports, we’ll be watching the new orders line items as well as prices paid to keep tabs on the speed of the economy entering the second quarter in addition to potential inflation worries. In terms of potential inflation, we, along with the investing herd, will be closely scrutinizing the wage data in the March Employment Report. We will be sure to dig one layer deeper, denoting the difference between supervisory and non-supervisory wages. As you’ll recall, those that didn’t do that failed to realize the would-be worry found in the January Employment Report was rather misleading.

In addition to those items, we’ll also be looking at key data items for several Tematica Investing Select List positions. For example,  the March heavy-duty truck order figures that should validate our thesis on Paccar (PCAR) shares, while Costco Wholesale’s (COST) March same-store sales figures should show continued wallet share gains for Cash-strapped Consumer, and the monthly gaming data from Nevada and Macau will clue us in to how that aspect of our Guilty Pleasure investing theme did in February and March.

 

Gearing Up for 1Q 2018 Earnings Season

Last Friday we officially closed the books on 1Q 2018, and that means before too long we’ll soon be staring down the gauntlet of first-quarter earnings season. With that in mind, let’s get a status check as to where the market is trading. Current expectations for the S&P 500 call for 2018 EPS to grow 18.5% year over year to $157.70. Helping fuel this forecast is the expected benefit of tax reform, which is leading to EPS forecasts for a rise of more than 18% year over year in the first half of 2018 and nearly 21% in the back half of the year. To put some perspective around that, annual EPS growth has averaged 7.6% over the 2002-2017 period. As we parse the data, we’d point out that on a per-share basis, estimated earnings for the first quarter have risen by 5.3% since Dec. 31; historically, analysts have reduced those expectations during the first few months of the year.

 

 

What do we think?

While we remain bullish on the potential investments and incremental cash in consumer pockets because of tax reform, we have to point out the risk that tax reform-infused GDP expectations — and therefore EPS expectations — could be a tad lofty. We’ve already seen a growing number of companies use the incremental cash flow to scale up buyback programs and in some cases dividends. Also, as we’ve seen in the past, consumers, especially those wallowing in debt, may opt to lighten the debt load. Lenore made this point last week when she appeared on Fox News’s Tucker Carlson Tonight.

 

 

Again, this is a possibility and one that we’ll be monitoring as we get more data in the coming weeks and months as we look to position the Tematica Investing Select List for what’s to come in 2018 and beyond. Combined with the rising concern of tariffs and trade that could disrupt supply and goose inflation in the short to medium term, it’s going to be even more of a challenge to parse company guidance to be had in the coming weeks that could be less than clear. I’ll be sure to break out my extra decoder ring as I get my seatbelt secured for what is looking to be a bumpy set of weeks.

As I noted above, we were prudently choosey with the Tematica Investing Select List in 1Q 2018, and while we will continue to be so as share prices come in, I’ll look to take advantage of the improving risk-to-reward profiles to be had.

 

WEEKLY ISSUE: The Impact of Tariffs and Continued Rundown of Select Positions

WEEKLY ISSUE: The Impact of Tariffs and Continued Rundown of Select Positions

 

Our Latest Thoughts on Trump Tariffs

The stock market roller coaster of the last few weeks is clearly continuing. This week we have President Trump’s potential steel and aluminum tariffs take center stage, shifting the attention away from Fed Chief Jerome Powell last week. When I shared with you my view the market would trade data point to data point until the end of the Fed’s Mar. 20-21 monetary policy meeting, I certainly didn’t expect let alone anticipate these tariffs and their escalating conversation to be a part of it. In a post earlier this week, I shared my view that Trump is once again utilizing the negotiating strategy he laid out in his book, Art of the Deal. In another one today, I gamed out what is likely to happen should Trump go forward with the tariffs.

Last night’s resignation of Trump economic advisor Gary Cohn has certainly fanned the flames of uncertainty over the tariffs, with more people thinking that Trump is “serious.” In an effort to counterbalance that resignation, this morning Commerce Secretary Wilbur Ross shared that Trump “has indicated a degree of flexibility on tariffs for Canada and Mexico.” That Cohn-related walk-back by Secretary Ross, combined with comments made yesterday by Treasury Secretary Steven Mnuchin that indicated that “once a new NAFTA deal is reached, the trading partners wouldn’t be subject to the tariffs” confirms my view that Trump remains on the Art of the Deal negotiation path.

In my post earlier this morning about the tariffs, I shared that we will likely see choppy waters as this issue comes to a resolution and leads up to the Fed’s next monetary policy meeting conclusion on March 21. Expect volatility to remain in place and the coming economic data will either amplify or quell its magnitude. Barring any breaking news, I’ll be on The Intelligence Report with Trish Regan on FOX Business to discuss all of this at 2 PM ET today.

While many fret over the market swings, my perspective is that the domestic economy remains on firm footing and barring a trade war volatility will allow us to pick up thematically well-positioned companies at better prices. A great example of this was had earlier this week with the February heavy truck orders that served to confirm my thesis behind Paccar (PCAR) shares.

When Costco Wholesale (COST) reports its quarterly results after the market close, we should see similar confirmation in the form of not only wallet share gains via its top line results, but also in rising membership fees as more consumers look to stretch the disposable income they do have, a key component of our Cash-Strapped Consumers investment theme.

To set the stage for Costco’s report tonight, consensus expectations for the quarter sit at EPS of $1.46 on revenue of $32.7 billion, up from $1.17 and $29.8 billion in the year-ago quarter. As a reminder, one of the key differentiators for Costco is the high margin membership fees that are poised to grow as the company continues to open new warehouses. This means, at least for me, that roadmap, will be one of the areas of focus on the company’s post-earnings conference call. I’ll also be listening to see the impact of tax reform on the company’s outlook for 2018.

  • Our price target on Paccar (PCAR) shares remains $85.
  • Our price target on Costco Wholesale (COST) shares remains $200.

 

 

Getting back to the Tematica Investing Select List

In last week’s issue, I began sharing some much-needed updates across the Select List, and I’m back at it again this week with a few more. Over the next few weeks, I’ll look to round out the list before we break at the end of March and get ready to gear up for 1Q 2108 earnings season.

Yes… I know… before too long it will once again be time for that zaniness.

All the more important to share these updates with you so we set the table for the earnings meal to be had.

 

Amazon (AMZN),  Connected Society

Simply put, Amazon shares have been a champ so far in 2018 rising more than 30%, which brings the return on the Select List to more than 100% since being added back in 2016. I’ve said these shares are ones to own, not trade given the accelerating shift to digital commerce, and growing adoption of the high margin, secret sauce that is Amazon Web Services as more businesses turn to the cloud. As filled with creative destruction as those two businesses are, it looks like Amazon is poised to offer further disruption in the healthcare and financial services business given conversations with JPMorgan (JPM), Berkshire Hathaway (BRK.A), Capital One (COF) and others.

I’ve raised our price target several times on AMZN shares, and it increasingly looks like that will have to happen again and then some depending on how soon these new layers of disruption materialize.

  • Our price target on Amazon (AMZN) shares remains $1,750.

 

Starbucks (SBUX), Guilty Pleasure

Year to date, Starbucks shares are essentially unchanged compared to where they were trading as we exited 2017. And the same is true if we look at the shares over the last year – they are up modestly. What we are dealing with here is a company that is once again in transition as it looks to invigorate its domestic business while growing its presence in still underserved markets outside the US like China and Italy. One of the central strategies in both areas is to leverage its high-end Reserve Roastery concept, which keeps the company very much in tune with our Guilty Pleasure investing theme.

Historically speaking, Starbucks has been a company that has been able to successfully pivot its business when it has stumbled, and in our view, that merits some patience with the shares. Helping fuel that patience is the knowledge that Starbucks intends to return $15 billion to shareholders over the next three years in the form of dividends and buybacks.

  • Our price target on Starbucks (SBUX) shares remains $68

 

Disney (DIS), Content is King

Disney shares have traded off some 3% thus far in 2018, which is not unsurprising given we are in the seasonally weakest part of the year for the company. That said, the latest Marvel film, The Black Panther, is crushing it at the box office and ups the ante for the next Avengers film that will hit theaters in a few months. Disney continues to leverage these and other characters as it revamps its theme parks and hotels, which should drive attendance despite yet another round of price increases.

The big “wait and see” for Disney over the coming months will be its move into its own streaming services for both ESPN and eventually a Disney content-centric service. While I see this as Disney making the right moves to address the chord cutting headwind that is part of our Connected Society investing theme, to paraphrase the great film Bull Durham, just because Disney builds it doesn’t mean people will stream it. In a positive move, Disney installed James Pitaro as the new president of ESPN. Mr. Pitaro’s background as chairman of Disney Consumer Products and Interactive Media, as well as the head of Yahoo! Media, sends investors the signal that getting the streaming services in place will be a top priority going forward for ESPN.

The next catalyst to be had for Disney will be spring break and then the summer movie season. Between now and then, I expect Disney will continue to put its massive buyback program to work.

  • Our price target on Disney (DIS) shares remains $125

 

United Parcel Service, Connected Society

Our UPS shares were hard hit earlier in the year given renewed concerns that Amazon would expand its own logistics offering. At the time, my view was this was an overblown concern, and it still is. This week, we saw Stifel Nicolaus warm up to the shares, upping them to a Buy rating with a $121 price target given what it sees as a “strong underlying package and freight businesses.”

Each month in the Retail Sales report we see the share gains had at non-store retailers, and we know companies ranging from Costco and Walmart (WMT) to Nike (NKE) and many others are embracing the Direct to Consumer (D2C) business model. All of this bodes well for UPS shares over the coming year.

The one potential hiccup to watch will be negotiations with the Teamsters Union this summer. If that brings the shares near or below our Select List entry point, I’ll look to scale into this position ahead of the seasonally strong second half of the year.

  • Our price target on United Parcel Service (UPS) shares remains $130.

 

 

Is Trump Serious About the Tariffs or Is This Just a Big Game of Chicken?

Is Trump Serious About the Tariffs or Is This Just a Big Game of Chicken?

 

After a whipsaw trading week, as we enter the new week I am pondering all the implications of President Trump’s Tariff talk. As Tematica’s Chief Macro Strategist, Lenore Hawkins, discussed in last week’s Weekly Wrap the markets were blindsided last Thursday when President Trump announced that the U.S. will implement a 25% import tariff on steel and 10% tariff on aluminum. Over the weekend, in response to any retaliation from the EU, Trump tweeted a countermove.

 

 

The President’s fresh injection of uncertainty led equities to sell off again this Monday morning as investors and talking heads alike chewed on potential implications to be had.

On Fox Business’s The Intelligence Report with Trish Regan last Friday afternoon— you can watch that video —I shared my view that we have to question whether President Trump will go ahead with these proposed tariffs or is it a negotiating tactic at a time when NAFTA negotiations remain underway? We’ve seen the president pull this tactic from his book, Art of the Deal, several times over the last year and given the potential consequence of a trade war to the domestic economy as well as the stock market, my opinion is we can’t rule this possibility out.

While it’s true that Trump escalated things over the weekend in a tweet saying, “If the E.U. wants to further increase their already massive tariffs and barriers on U.S. companies doing business there, we will simply apply a Tax on their Cars which freely pour into the U.S. They make it impossible for our cars (and more) to sell there. Big trade imbalance!” his policy management by tweet returned to his view on how unfair U.S. trade deals are with Mexico and other countries. “Tariffs on Steel and Aluminum will only come off if new & fair NAFTA agreement is signed,” Trump tweeted. As a reminder, during the presidential campaign, Trump promised to renegotiate NAFTA with Canada and Mexico.

 

 

 

Already over the weekend and this morning have seen several Trump lieutenants make the rounds, including White House trade adviser Peter Navarro saying on CNN that “There will be an exemption procedure for particular cases where we need to have exemptions so that business can move forward.”

We’ll have to wait for the next two weeks to pass to see if this is indeed a Trump bluff, but with the U.S. economy, corporate profits and global stock markets all hanging in the balance, it is one massive game of chicken. While there may be a better trade deal to be gained by utilizing this now near playbook-esque negotiating tactic, it will also escalate the geopolitical landscape. If other countries don’t blink, we are likely to see some geopolitical issues weigh on a stock market that is already trading data point to data point ahead of the Fed’s next monetary policy meeting results. It’s going to be a long set of days until March 21st.

Tomorrow, I’ll game out the possible implications of these trade tariffs and what it may mean for the economy, businesses and their stock prices and Trump. Read that post now by clicking here.