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Weekly Issue: While Most Eyes Are on the Fed, We Look at a Farfetch(ed) Idea

Weekly Issue: While Most Eyes Are on the Fed, We Look at a Farfetch(ed) Idea

Key points inside this issue

  • The Fed Takes Center Stage Once Again
  • Farfetch Limited (FTCH) – A fashionable Living the Life Thematic Leader
  • Digital Lifestyle – The August Retail Sales confirms the adoption continues

 

Economics & Expectations

The Fed Takes Center Stage Once Again

As we saw last week, the primary drivers of the stock market continue to be developments on the U.S.-China trade front and the next steps in monetary policy. As the European Central Bank stepped up its monetary policy loosening, it left some to wonder how much dry powder it had remaining should the global economy slow further and tip into a recession. Amid those concerns, along with some discrepancy among reports that President Trump would acquiesce to a two-step trade deal with China, stocks finished last week with a whimper after rebounding Wednesday and Thursday.

We continue to see intellectual property and national security as key tenets in negotiating a trade deal with China. We will watch as the lead up to October’s next round of trade negotiations unfolds. Given the Fed’s next two-day monetary policy meeting that begins on Tuesday and culminates with the Fed’s announcement and subsequent press conference, barring any new U.S.-China trade developments before then, it’s safe to say what the Fed says will be a key driver of the stock market this week.

Leading up to that next Fed press conference, we will get the August data for Industrial Production and Housing Starts as well as the September Empire State Manufacturing Index. Paired with Friday’s August Retail Sales report and last Thursday’s August CPI report, that will be some of the last data the Fed factors into its policy decision.

Per the CME Group’s FedWatch tool, the market sees an 82% probability for the Fed to cut interest rates by 25 basis points this week with possibly one more rate cut to be had before we exit 2019. Normally speaking, parsing the Fed’s words and Fe Chair Powell’s presser commentary are key to getting inside the central bank’s “head,” and this will be especially important this time around. One of our concerns has been the difference between the economic data and the expectations it is yielding in the stock market. Should the Fed manage to catch the market off guard, odds are it will give the market a touch of agita.

On the earnings front

there are five reports that we’ll be paying close attention to this week. They are Adobe Systems (ADBE), Chewy (CHWY), FedEx (FDX), General Mills (GIS) and Darden Restaurants (DRI). With Adobe, we’ll be examining the rate of growth tied to cloud, an aspect of our Disruptive Innovators investing theme. With Darden we’ll look to see if the performance at its full-service restaurants matches up with the consumer trade-down data being reported by the National Restaurant Association. That data has powered shares of Cleaner Living Thematic Leader and Cleaner Living Index resident Chipotle Mexican Grill (CMG) higher of late, bringing the year to date return to 82% vs. 20% for the S&P 500. Chewy is a Digital Lifestyle company that is focused on the pet market serving up food, toys, medications and other pet products. Fedex will not only offer some confirmation on the digital shopping aspect of our Digital Lifestyle investing theme it will also shed some light on the global economy as well.

 

Farfetch Limited – A fashionable Living the Life Thematic Leader

In last week’s issue, I mentioned that I was collecting my thoughts on Farfetch Limited (FTCH), a company that sits at the intersection of the luxury goods market and digital commerce. Said thematically, Farfetch is a company that reflects our Living the Life investment theme, while also benefitting from tailwinds of our Digital Lifestyle theme. Even though the company went public last year, it’s not a household name even though it operates a global luxury digital marketplace. As the shares have fallen over the last several weeks, I’ve had my eyes on them and now is the time to dip our toes in the water by adding FTCH as a Thematic Leader.

 

 

Farfetch Provides Digital Shopping to the Exploding Global Luxury Market

Farfetch is a play on the global $100 billion online luxury market with access to over 3,200 different brands across more than 1,100 brand boutique partners across its platform. With both high-end and every-day consumers continuing to shift their shopping to online and mobile platforms, we see Farfetch attacking a growing market that also has the combined benefit of appealing to the aspirational shopper and being relatively inelastic compared to mainstream apparel.

Part of what is fueling the global demand for luxury and aspirational goods is the rising disposable income of consumers in Asia, particularly China. According to Hurun’s report, The Chinese Luxury Traveler, enthusiasm for overseas travel shows no signs of abating, with the proportion of time spent on overseas tourism among luxury travelers increasing 5% to become 70% of the total. Cosmetics, (45%), local specialties (43%), luggage (39%), clothing and accessories (37%) and jewelry (34%) remain the most sought — after items among luxury travelers. High domestic import duties and concerns about fake products contribute to the popularity of shopping abroad.

It should come as little surprise then that roughly 31% of FarFetch’s 2018 revenue was derived from Asia-Pacific with the balance split between Europe, Middle East & Africa (40%) and the Americas (29%). At the end of the June 2019 quarter, the company had 1.77 million active customers, up from 1.35 million exiting 2018 and 0.9 million in 2017. As the number of active users has grown so too has Farfetch’s revenue, which hit $718 million over the 12 months ending June 2019 compared to $602 million in all of 2018 and $386 million in 2017.

Farfetch primarily monetizes its platform by serving as a commercial intermediary between sellers and end consumers and earns a commission for this service. That revenue stream also includes fees charged to sellers for other activities, such as packaging, credit-card processing, and other transaction processing activities. That business accounts for 80%-85% of Farfetch’s overall revenue with the balance derived from Platform Fulfillment Revenue and to a small extent In-Store Revenue.

New Acquisition Transformed Farfetch’s Revenue Mix 

In August, Farfetch announced the acquisition of New Guards Group, the Milan-based parent company of Off-White, Heron Preston and Palm Angels, in a deal valued at $675 million. New Guards will serve as the basis for a new business segment at Farfetch, one that it has named Brand Platform. Brand Platform will allow Farfetch to leverage New Guards’ design and product capabilities to expand the reach of its brands as well as develop new brands that span the Farfetch platform. For the 12-month period ending April 2019, the New Guards portfolio delivered revenue of $345 million, with profits before tax of $95 million. By comparison, Farfetch posted $654 million in revenue and an operating loss of $183 million over that time frame.

Clearly, another part of the thought behind acquiring New Guards and building the Brand Platform business is to improve the company’s margin and profit profile. And on the housekeeping front, the $675 million paid for New Guards will be equally split between cash and stock. Following its IPO last year, Farfetch ended the June quarter with roughly $1 billion in cash and equivalents on its balance sheet.

In many ways what we have here is a baby Amazon (AMZN) that is focused on luxury goods. Ah, the evolution of digital shopping! And while there are a number of publicly traded companies tied to digital shopping, there are few that focus solely on luxury goods.

Why Now is the Time to Add FTCH Shares

We are heading into the company’s seasonally strongest time of year, the holiday shopping season, and over the last few years, the December quarter has accounted for almost 35% of Farfetch’s annual sales. With the company’s active user base continuing to grow by leaps and bounds, that historical pattern is likely to repeat itself. Current consensus expectations have Farfetch hitting $964 million in revenue for all of 2019 and then $1.4 billion in 2020.

At the current share price, FTCH shares are trading at 1.6x expected 2020 sales on an enterprise value-to-sales basis. The consensus price target among the 10 Wall Street analysts that cover the stock is $22, which equates to an EV/2020 sales multiple of near 3.5x when adjusting for the pending New Guards acquisition. As we move through this valuation exercise, we have to factor into our thinking that Farfetch is not expected to become EBITDA positive until 2021. In our view, that warrants a bit of haircut on the multiple side and utilizing an EV/2020 sale multiple of 2.5x derives our $16 price target.

  • Despite that multiple, there is roughly 60% potential upside to that target vs. downside to the 52-week low of $8.82.
  • We are adding FTCH shares to the Thematic Leaders for our Living the Life investing theme.
  • A $16 price target is being set and we will wait to put any sort of stop-loss floor in place.

 

Digital Lifestyle – The August Retail Sales confirms the adoption continues

One of last week’s key economic reports was the August Retail Sales report due in part to the simple fact the consumer directly or indirectly accounts for two-thirds of the domestic economy. Moreover, with the manufacturing and industrial facing data – both economic and other third-party kinds, such as truck tonnage, railcar loadings and the like – softening in the June quarter, that quarter’s positive GDP print hinged entirely on the consumer. With domestic manufacturing and industrial data weakening further in July and August, the looming question being asked by many an investor is whether the consumer can keep the economy chugging along?

In recent months, I’ve voiced growing concerns over the spending health of the consumer as more data suggests a strengthening tailwind for our Middle-Class Squeeze investing theme. Some of that includes the Federal Reserve Bank of New York’s latest Household Debt and Credit Report, consumer household debt balances have been on the rise for five years and quarterly increases continue on a consecutive basis, bringing the second quarter 2019 total to $192 billion. Also a growing number of banks are warning over rising credit card delinquencies even as the Federal Reserve’s July Consumer Credit data showed revolving credit expanded at its fastest pace since November 2017.

Getting back to the August Retail Sale report, the headline print was a tad better than expected, however once we removed auto sales, retail sales for the month were flat. That’s on a sequential basis, but when viewed on a year over year one, retail sales excluding autos rose 3.5% year over year. That brought the year over year comparison for the three-months ending with August to up 3.4% and 1.5% stronger than the three months ending in May on the same basis.

Again, perspective can be illuminating when looking at the data, but what really shined during the month of August was digital shopping, which rose 16.0% year over year. That continued strength following the expected July surge in digital shopping due to Amazon Prime Day and all the others that looked to cash in on it led year over year digital shopping sales to rise 15.0% for the three months ending in August.

Without question, this aspect of our Digital Lifestyle investing theme continues to take consumer wallet share, primarily at the expense of brick & mortar retailers, especially department stores, which saw their August retail sales fall 5.4%. That continues the pain felt by department stores and helps explain why more than 7,000 brick & mortar locations have shuttered their doors thus far in 2019. Odds are there is more of that to come as consumers continue to shift their dollar purchase volume to online and mobile shopping as Walmart (WMT), Target (TGT) and others look to compete with Amazon Prime’s one day delivery.

  • For all the reasons discussed above, Amazon remains our Thematic King as we head into the seasonally strong holiday shopping season. 

 

After years of growth, Chinese tourism to the US falls

After years of growth, Chinese tourism to the US falls

The impact of the slowing global economy and current trade war can be found in a number of places. The most common is the equity markets, which have seen their 2019 gains recede. We’ve also seen US retailers report dismal quarterly results of late, with falling same-store comparisons. But another victim has been China led tourism to the U.S., which historically has brought Chinese consumers looking to snap up branded US goods as part of our Living the Life investing theme.

While the latest data shows a drop in 2018, so far this year US-China trade tensions have increased dramatically complete with another round of tariff increases on both sides. This combination is likely to divert Chinese travelers to the US yet again this year searching for luxury goods that are not impacted by trade tariffs. This suggests that at least one of several drivers of the challenging environment for US retailers is poised to continue.

Chinese tourism to the U.S. was down in 2018 for the first time since 2003 as the trade war between the two countries rages on.

According to a report in the AP, citing the National Travel and Tourism Office, travel from China to the U.S. declined 5.7 percent to 2.9 million visitors last year, marking the first year-over-year decline since 2003. Tensions between China and the U.S. was cited as one of the reasons fewer tourists are visiting.

Earlier this month, President Donald Trump slapped tariffs on $200 billion worth of Chinese products coming into the U.S. The White House also blacklisted Huawei, the Chinese telecom player, preventing it from doing business in the country. China has retaliated with its own tariffs on $60 billion of U.S. products coming into China. The report noted that in the summer of 2018, China issued a travel warning, urging its citizens to be careful due to shootings, robberies and costly medical care in the U.S. The U.S. countered with its own travel warning for U.S. citizens visiting China.

In addition to the trade war, the AP reported that economic concerns on the part of Chinese consumers are limiting travel to the U.S. Chinese citizens with less income are opting to vacation closer to home, noted Wolfgang Georg Arlt, the director of the Chinese Outbound Tourism Research Institute. The research firm said 56 percent of travelers leaving China in the last 90 days of 2018 were headed for Hong Kong, Macau or Taiwan, up from 50 percent in 2017. The Chinese consumers that are venturing farther are visiting exotic places including Croatia, Morocco and Nepal.

Industry watchers said the decline in Chinese tourism to the U.S. isn’t likely to last for long, as the middle class in China is expected to continue to grow. The U.S. expects Chinese tourism to increase by 2 percent in 2019, reaching 3.3 million visitors. By 2023, the U.S. government expects that will increase to 4.1 million visitors. “Even if the Chinese economy cools, it’s still going to continue to be a very good source of growth for the travel industry,” said David Huether, senior vice president of research for the U.S. Travel Association.

Source: Chinese Tourism To US Down After Years Of Growth | PYMNTS.com

Weekly Issue: As trade concerns escalate, investors brace for an expectations reset

Weekly Issue: As trade concerns escalate, investors brace for an expectations reset


Key points inside this issue

  • Safety & Security Thematic Leader is up big year to date, and new body camera and digital records products hitting later this year should accelerate the company’s transition. Our long-term price target on AAXN shares remains $90.
  • The April Retail Sales Report should offer confirmation for Thematic King Amazon (AMZN) as well as Middle-Class Squeeze Thematic Leader Costco Wholesale (COST). 


Given the wide swings in the market over the last few days that are tied back to the changing US-China trade talk landscape, I thought it prudent to share my latest thoughts even if it’s a day earlier than usual. 

As we discussed in the last issue of Tematica Investing, we knew that coming into last week, it was going to be a challenging one. Trade tensions kicked up to levels few were expecting 10 days ago and as the week progressed the tension and uncertainty crept even higher. We all know the stock market is no fan of uncertainty, but when paired with upsized tariffs from both the US and China that will present new economic and earnings headwinds, something that was not foreseen just a few weeks ago, investors will once again have to revisit their expectations for the economy and earnings. And yes, odds are those past and even more recent expectations will be revisited to the downside. 

What was originally thought to have been President Trump looking to squeeze some last- minute trade deal points out of the Chinese instead turned out to be more of a response to China’s attempt to do the same. This revealed the tenuous state of U.S./China trade talks. Last Friday morning, the U.S. had boosted tariffs to 25% from 10% on $200 billion worth of Chinese goods with President Trump tweeting there is “absolutely no need to rush” and that “China should not renegotiate deals with the U.S. at the last minute.” Even as the new tariffs and tweets arrived, trade negotiations continued Friday in Washington with no trade deal put in place, which dashed the hopes of some traders. Candidly, I didn’t expect a trade deal to emerge given what had transpired over the prior week. 

That hope-inspired rebound late Friday in the domestic stock market returned to renewed market pressure over the weekend and into this week as more questions over U.S.-China trade have emerged. As we started off this week, the trade angst between the U.S. and China has edged higher as China has responded to last week’s U.S. tariff bump by saying it would increase tariffs on $60 billion of U.S. goods to 25% from 10% beginning June 1st. Clearly, the latest round of tweets from President Trump won’t ease investor concern as to how the trade talks will move forward from here.

As the trade war rhetoric kicks up alongside tariffs, the next date to watch will be the G-20 economic summit in Japan next month. According to Trump economic adviser Larry Kudlow, there is a “strong possibility” Trump will meet Chinese President Xi and this morning President Trump confirmed that. 

The cherry or cherries on top of all of this is the growing worries over increasing tension with Iran, which is weighing on the market this morning, and yet another 2019 growth forecast cut by the EU that came complete with a fresh warning on Italy’s debt levels. Growth projections by the European Commission showed a mere 0.1% for GDP growth this year in Italy. The country has the second-largest debt pile in the EU and, according to the latest forecasts by the commission, the Italian debt-to-GDP ratio will hit 133% this year and rise to 135% in 2020. I point these out not to worry or spook you, but rather remind you there are other issues than just US-China trade that have to be factored into our thinking.

The natural market reaction to all of these concerns is to adopt a “risk off” attitude, which, as we’ve seen before, can ignite a storm of “fire first, ask questions later.” And as should be no surprise, that has fueled the sharp move lower in the major market indices. Over the last several days, the S&P 500, which as we know if the barometer used by most institutional and professional investors, fell 4.7% while the small-cap heavy Russell 2000 dropped 5.7%.

At times like this, it pays to do nothing. Hard to believe but as you’ve often heard few will step in to catch a falling knife and given the sharp declines, we also run the risk of a dead cat bounce in the market. We should be patient until the market finds its footing, which means parsing what comes next on the economic and earnings as well as trade front.  

I’ll continue to look for replacements for open Thematic Leader slots as well as other contenders poised to benefit from our pronounced thematic tailwinds. In the near-term, that will mean focusing on ones that also have a more U.S.-focused business model, a focus on inelastic and consumable products. Another avenue that investors are likely to revisit is dividend-paying companies, particularly those that fall into the Dividend Aristocrats category because they’ve consistently grown their dividends for the past 10 years. As I sift through the would-be contenders, I’ll be sure to look for those that intersect our investing themes and the aristocrats. 


Tematica Investing

As the stock market has come under pressure, a number of our Thematic Leaders, as well as companies on the Select List, have given back some of their year-to-date gains. One that has rallied and moved higher in spite of the market sell-off is Safety & Security Thematic Leader Axon Enterprises (AAXN) and are up some 48% year to date. That makes it the second-best performer on the Thematic Leaderboard year to date behind Clean Living company Chipotle Mexican Grill (CMG) that is up nearly 60% even after the market’s recent bout of indigestion.

Axon reported its March quarter earnings last week, which saw revenue grow 14% year over year as Axon continues to shift its business mix from Taser hardware to its Software & Sensor business that fall under the Axon Body and Axon Records businesses. During the company’s earnings conference call, the management team shared its next gen products will be available during the back half of the year. These include the Axon Body, its first camera with LTE live streaming, will launch during the September quarter and Axon Records, its first stand-alone software product. Records w will launch with a major city police department and it is already testing with a second major police department. As far as the new Axon Body product, I suspect the untethering of this camera could spur adoption much the way Apple’s (AAPL) Apple Watch saw a pronounced pick up when it added cellular connectivity to its third model. 

These new products, which leverage the intersection between our Digital Infrastructure investing theme and our Safety & Security one, should accelerate the transition to a higher margin, recurring revenue business in the coming quarters. In other words, Axon’s transformation is poised to continue and as that happens investors will be revisiting how they value the company’s business. More than likely that means further upside ahead for AAXN shares. 

  • Our price target on Safety & Security Thematic Leader Axon Enterprises (AAXN) remains $90.


Here comes the April Retail Sales Report

Later this week, we’ll get the April Retail Sales Report, which should benefit for the late Easter holiday this year. Up until the March report, this data stream was disappointing during December through February but even so from a thematic perspective the reports continued to reinforce our Digital Lifestyle and Middle-class Squeeze investing themes. 

When we look at the April data, I’ll be looking at both the sequential and year over year comparisons for Nonstore retailers, the government category for digital shopping and the category that best captures Thematic King Amazon (AMZN). I’ll also be looking at the general merchandise stores category with regard to Middle-Class Squeeze Thematic Leader Costco Wholesale (COST). Costco has already shared its April same-store sales, which rose 7.7% in the US despite having one less shopping day during the month compared to last year. Excluding the impact of gas prices and foreign exchange, Costco’s April sales were up 5.6% year over year. From my perspective, the is the latest data point that shows Costco continues to take consumer wallet share. 

With reported disposable income data inside the monthly Personal Income & Spending reports essentially flat for the last few months and Costco continuing to open new warehouse locations, which should spur its high margin membership revenue, I continue to see further upside ahead in COST shares. And yes, the same applies to Amazon shares as well.

  • Our $250 price target for Middle-class Squeeze Thematic Leader Costco Wholesale (COST) is under review.


Weekly Issue: Looking to Avoid the Dead Cat Bounce

Weekly Issue: Looking to Avoid the Dead Cat Bounce


Key points inside this issue

  • As trade concerns escalate, investors brace for an expectations reset.
  • Safety & Security Thematic Leader is up big year to date, and new body camera and digital records products hitting later this year should accelerate the company’s transition. Our long-term price target on AAXN shares remains $90.
  • The April Retail Sales Report should offer confirmation for Thematic King Amazon (AMZN) as well as Middle-class Squeeze Thematic Leader Costco Wholesale (COST). 
  • Given the wide swings in the market over the last few days and the risk of a dead cat bounce, we are once again remaining on the sidelines when it comes to a new option recommendation. 


Given the wide swings in the market over the last few days that are tied back to the changing US-China trade talk landscape, I thought it prudent to share my latest thoughts even if it’s a day earlier than usual. 


As trade concerns escalate, investors brace for an expectations reset

As we discussed in the last issue of Tematica Investing, we knew that coming into last week, it was going to be a challenging one. Trade tensions kicked up to levels few were expecting 10 days ago and as the week progressed the tension and uncertainty crept even higher. We all know the stock market is no fan of uncertainty, but when paired with upsized tariffs from both the US and China that will present new economic and earnings headwinds, something that was not foreseen just a few weeks ago, investors will once again have to revisit their expectations for the economy and earnings. And yes, odds are those past and even more recent expectations will be revisited to the downside. 

What was originally thought to have been President Trump looking to squeeze some last- minute trade deal points out of the Chinese instead turned out to be more of a response to China’s attempt to do the same. This revealed the tenuous state of U.S./China trade talks. Last Friday morning, the U.S. had boosted tariffs to 25% from 10% on $200 billion worth of Chinese goods with President Trump tweeting there is “absolutely no need to rush” and that “China should not renegotiate deals with the U.S. at the last minute.” Even as the new tariffs and tweets arrived, trade negotiations continued Friday in Washington with no trade deal put in place, which dashed the hopes of some traders. Candidly, I didn’t expect a trade deal to emerge given what had transpired over the prior week. 

That hope-inspired rebound late Friday in the domestic stock market returned to renewed market pressure over the weekend and into this week as more questions over U.S.-China trade have emerged. As we started off this week, the trade angst between the U.S. and China has edged higher as China has responded to last week’s U.S. tariff bump by saying it would increase tariffs on $60 billion of U.S. goods to 25% from 10% beginning June 1st. Clearly, the latest round of tweets from President Trump won’t ease investor concern as to how the trade talks will move forward from here.

As the trade war rhetoric kicks up alongside tariffs, the next date to watch will be the G-20 economic summit in Japan next month. According to Trump economic adviser Larry Kudlow, there is a “strong possibility” Trump will meet Chinese President Xi and this morning President Trump confirmed that. 

The cherry or cherries on top of all of this is the growing worries over increasing tension with Iran, which is weighing on the market this morning, and yet another 2019 growth forecast cut by the EU that came complete with a fresh warning on Italy’s debt levels. Growth projections by the European Commission showed a mere 0.1% for GDP growth this year in Italy. The country has the second-largest debt pile in the EU and, according to the latest forecasts by the commission, the Italian debt-to-GDP ratio will hit 133% this year and rise to 135% in 2020. I point these out not to worry or spook you, but rather remind you there are other issues than just US-China trade that have to be factored into our thinking.

The natural market reaction to all of these concerns is to adopt a “risk off” attitude, which, as we’ve seen before, can ignite a storm of “fire first, ask questions later.” And as should be no surprise, that has fueled the sharp move lower in the major market indices. Over the last several days, the S&P 500, which as we know if the barometer used by most institutional and professional investors, fell 4.7% while the small-cap heavy Russell 2000 dropped 5.7%.

At times like this, it pays to do nothing. Hard to believe but as you’ve often heard few will step in to catch a falling knife and given the sharp declines, we also run the risk of a dead cat bounce in the market. We should be patient until the market finds its footing, which means parsing what comes next on the economic and earnings as well as trade front.  

I’ll continue to look for replacements for open Thematic Leader slots as well as other contenders poised to benefit from our pronounced thematic tailwinds. In the near-term, that will mean focusing on ones that also have a more U.S.-focused business model, a focus on inelastic and consumable products. Another avenue that investors are likely to revisit is dividend-paying companies, particularly those that fall into the Dividend Aristocrats category because they’ve consistently grown their dividends for the past 10 years. As I sift through the would-be contenders, I’ll be sure to look for those that intersect our investing themes and the aristocrats. 


Tematica Investing

As the stock market has come under pressure, a number of our Thematic Leaders, as well as companies on the Select List, have given back some of their year-to-date gains. One that has rallied and moved higher in spite of the market sell-off is Safety & Security Thematic Leader Axon Enterprises (AAXN) and are up some 48% year to date. That makes it the second-best performer on the Thematic Leaderboard year to date behind Clean Living company Chipotle Mexican Grill (CMG) that is up nearly 60% even after the market’s recent bout of indigestion.

Axon reported its March quarter earnings last week, which saw revenue grow 14% year over year as Axon continues to shift its business mix from Taser hardware to its Software & Sensor business that fall under the Axon Body and Axon Records businesses. During the company’s earnings conference call, the management team shared its next gen products will be available during the back half of the year. These include the Axon Body, its first camera with LTE live streaming, will launch during the September quarter and Axon Records, its first stand-alone software product. Records w will launch with a major city police department and it is already testing with a second major police department. As far as the new Axon Body product, I suspect the untethering of this camera could spur adoption much the way Apple’s (AAPL) Apple Watch saw a pronounced pick up when it added cellular connectivity to its third model. 

These new products, which leverage the intersection between our Digital Infrastructure investing theme and our Safety & Security one, should accelerate the transition to a higher margin, recurring revenue business in the coming quarters. In other words, Axon’s transformation is poised to continue and as that happens investors will be revisiting how they value the company’s business. More than likely that means further upside ahead for AAXN shares. 

  • Our price target on Safety & Security Thematic Leader Axon Enterprises (AAXN) remains $90.


Here comes the April Retail Sales Report

Later this week, we’ll get the April Retail Sales Report, which should benefit for the late Easter holiday this year. Up until the March report, this data stream was disappointing during December through February but even so from a thematic perspective the reports continued to reinforce our Digital Lifestyle and Middle-class Squeeze investing themes. 

When we look at the April data, I’ll be looking at both the sequential and year over year comparisons for Nonstore retailers, the government category for digital shopping and the category that best captures Thematic King Amazon (AMZN). I’ll also be looking at the general merchandise stores category with regard to Middle-Class Squeeze Thematic Leader Costco Wholesale (COST). Costco has already shared its April same-store sales, which rose 7.7% in the US despite having one less shopping day during the month compared to last year. Excluding the impact of gas prices and foreign exchange, Costco’s April sales were up 5.6% year over year. From my perspective, the is the latest data point that shows Costco continues to take consumer wallet share. 

With reported disposable income data inside the monthly Personal Income & Spending reports essentially flat for the last few months and Costco continuing to open new warehouse locations, which should spur its high margin membership revenue, I continue to see further upside ahead in COST shares. And yes, the same applies to Amazon shares as well.

  • Our $250 price target for Middle-class Squeeze Thematic Leader Costco Wholesale (COST) is under review.


Tematica Options+

For the last two weeks, we’ve sat on the sidelines in terms of a new call option position. Given the sharp move lower in that time –roughly 4.5% for the S&P 500 and more than 5.7% for the small-cap heavy Russell 2000, which included last Friday’s sharp reversal before giving it all back and earlier this week – it has been a volatile time for trading options. 

Coming after the market’s sharp move lower on Monday, one of my concerns is avoiding a potential dead cat bounce in the stock market, which we’ve seen happen before in the past during quick swings to the downside. The key during times like this is to preserve capital rather than get whipsawed. Being prudent rather than overly risky. 

As we move through the week, we’ll get the April Retail Sales report. As we get and dissect that report, I’ll be assessing a new call option prospect in either TJX Companies (TJX) or Ross Stores (ROST), both of which have domestic-focused businesses and are riding our Middle-class Squeeze investing theme. 

Hospitals push device makers to improve security following cyberattacks 

Hospitals push device makers to improve security following cyberattacks 

As the kinds of cyber attacks companies and other businesses are experiencing expand, we are seeing the actual victims, as well as potential ones of these attacks, step up their efforts to protect themselves. In hospitals, one of the areas of focus is internet connected equipment, but we can see how this will quickly spill over to the burgeoning Internet of Things and larger 5G markets, igniting a new round of demand for companies that fall within the parameters of our Safety & Security investing theme.

Hospitals are pushing medical-device makers to improve cyber defenses of their internet-connected infusion pumps, biopsy imaging tables and other health-care products as reports of attacks rise.

Rattled by recent global cyberattacks, U.S. hospitals are conducting tests to detect weaknesses in specific devices, and asking manufacturers to reveal the proprietary software running the products in order to identify vulnerabilities. In some cases, hospitals have canceled orders and rejected bids for devices that lacked safety features.

Hospitals, after a decade of racing to wire up their medical records and an explosion of internet-connected medical devices, are growing more aggressive with technology suppliers amid pressure to better defend against incursions that could threaten patients and cause costly disruptions. Credit-rating agency Moody’s Investors Service in February ranked hospitals as one of the sectors most vulnerable to cyberattacks.

In stepping up their efforts, hospitals have gone beyond building firewalls and taking other actions to shield their own networks—they have moved into demanding information like the software running devices that manufacturers have long considered proprietary. The requests have generated tensions between the sides.

Source: Rattled by Cyberattacks, Hospitals Push Device Makers to Improve Security – WSJ

No bank branch, no problem

No bank branch, no problem

Several of us here at Tematica have been waiting for the day when banks would recognize that if they embraced our Digital Lifestyle investing theme, the bank branch would one day go the way of the cassette tape – a fond memory of a bygone era. While banks have made strides over the years between direct deposit and ACH payments that have shrunk the need to visit a bank branch, the debut of online-only banks, such as Chase’s Finn, and mobile payment platforms such as Apple Pay and PayPal’s Venmo have eliminated a number of reasons people used to go to the physical bank. We’ve even seen Capital One partner with Peet’s Coffee & Tea as well as other coffee shops and other non-branch locations.

To us, the long-term question is what will these banks and related institutions do with all of the existing bank branches? You may want to see what kinds of properties your REIT investments are holding.

While Bank of America Corp. and JPMorgan Chase & Co. were gobbling up cheap deposits at their thousands of branches around the U.S., Citigroup was shrinking its footprint, focusing on a handful of big cities to right itself after its near-collapse.

Now the bank’s executives are convinced that many U.S. consumers are finally ready to leave the branch behind and fully embrace digital banking. Citigroup added roughly $1 billion in digital deposits in the first quarter, more than all of last year. About two-thirds of that total came from new customers, and a little more than half came from people who don’t live near any of the bank’s roughly 700 branches.

In recent months, the bank has reorganized its consumer unit, knocking down walls between banking and cards. It rolled out a new account through its mobile app aimed at credit-card customers. And it is targeting potential customers with mobile-banking offers tied to the rewards they get for cards.

“For the 21st century, we are glad we never got the ballast of an extra 4,000 branches,” said Stephen Bird, the bank’s chief executive of global consumer banking. “I’m certain it’s going to turn out to be a very fortuitous thing.”

Other big banks are ramping up their digital offerings too, but they are doing it alongside their giant branch networks. Citigroup is wagering that many of those locations—more than 4,000 each for JPMorgan and Bank of America—will become burdensome.

Source: No Branch, No Problem. Citigroup Bets Big on Digital Banking. – WSJ

Warehouse Hiring Surges on Rising E-Commerce Demand

Warehouse Hiring Surges on Rising E-Commerce Demand

We see this every month in the Retail Sales report and almost every week in our everyday lives – consumers continue to flock to digital shopping – and that is spurring demand for distribution centers and warehouses as well as workers to fill them. As Amazon looks to expand not only the reach of its private label brands but move into the online pharmacy market courtesy of its PillPack acquisition, the odds are high that Walmart, Target and other companies will look to combat Amazon by at a minimum matching its buy/ship service. And that’s even before Amazon announced it will debut one-day shipping with Prime. More packages, more distribution centers, more jobs. A plain and simple result of our Digital Lifestyle investing theme.

Warehouse operators stepped up hiring in April as e-commerce demand drove up employment in distribution centers even as job growth across the rest of the freight-transportation sector slowed.

Warehousing and storage companies added 5,400 jobs last month, according to preliminary figures the Labor Department reported Friday, the fourth straight month of growth in a sector that includes fulfillment centers that process and ship online orders. The sector added nearly 70,000 jobs over the past 12 months.

The gains in warehousing and delivery come as rapid e-commerce growth pushes companies to open more fulfillment centers near major population centers to speed up delivery to customers. U.S. online sales jumped 14.2% in 2018, generating an estimated $513.6 billion, according to the U.S. Census Bureau.

Brian Devine, senior vice president of logistics-staffing firm ProLogistix, said he is seeing “huge growth” for logistics and e-commerce workers in key hubs like Southern California’s Inland Empire; areas of New Jersey near New York City; Atlanta; Indianapolis; and Memphis, Tenn.

“There are not enough workers in those markets,” Mr. Devine said. “The unemployment rate is so low that it’s difficult for us to fill those positions.” He said the average wage for ProLogistix workers jumped 6.8% in April from the same month a year ago, to $13.81 an hour.

Source: Warehouse Hiring Surges on Rising E-Commerce Demand – WSJ

Recession Proof, Bull Market and More of the Emperor’s New Clothes

Recession Proof, Bull Market and More of the Emperor’s New Clothes

This week the markets have been all about the on again/off again trade talks between the US and China and the latest updates from the Tweeter-in-Chief. The Volatility Index (VIX) is reaching a four-month high, which is seriously hurting all those who helped build up the record net short position on VIX futures during the last week of April.

The headlines are now asking, is this going to break this ever-so-fabulous bull market despite the booming economy. Bull market? Robust economy? These days I feel an awful lot like one of the few that see the emperor in fact does not have new clothes.

  • The S&P 500 is up 17% this year while the New York Fed recession probability measure has risen from 21% at the end of 2018 to 27%, the highest in 12 years, and has risen every month this year. This measure typically is flagging a recession when it moves between 30% and 40%.
  • First quarter earnings so far for the S&P 500 companies have fallen year-over-year and are expected to be negative next quarter as well yet Barron’s roundtable report on portfolio managers found 66% are bullish.

The NYSE Composite Index which is a much broader market metric than the S&P 500 is up all of 1% over the past year as of Wednesday’s close and has not made a new high in almost eight months while the small-cap Russell 2000 was down 1.3%. Yes, the S&P 500 was up 6.7% and the Dow Jones Industrial Average up 5.8%, but the iShares 20+ Year Treasury Bond ETF (TLT) was up 5.5% and the iShares 7-10 Year Treasury Bond ETF (IEF) was up 4.7%. When a longer-term bond ETF is outpacing the overall equity market by a material margin like that, we are not in a massive equity bull market.

^NYA Chart

^NYA data by YCharts

When the Utility sector has outperformed the Transport sector by nearly 14% over the past year, I’m not thinking the Bulls are stomping on the Bears nor is it telling me that Mr. Market thinks the overall economy is going like gangbusters.

IYT Chart

IYT data by YCharts

The Cass Freight Index backs up the lack of activity implied by the underperformance of Transports with the volume of shipments falling on a year-over-year basis for four consecutive months. How exactly is the economy accelerating when the volume of shipments has been declining?

Commodities support what we see in transportation.

^SG3J Chart

^SG3J data by YCharts

The Institute for Supply Management (ISM) Purchasing Managers Index (PMI) isn’t all that supportive of the S&P 500’s recent moves and also indicates an economy not exactly revving up.

US ISM PMI Chart

US ISM PMI data by YCharts

But what about last week’s jobs report that had everyone cheering? Just like the first Q1 GDP estimate, which we debunked here, the April jobs report was strong on headline data, weak in the details and lacking confirming data from other sources. The headline new jobs number came in 70k over expectations at 263k, which sounds fantastic, but as always, the details need to be investigated.

  • 93k (35%) of those jobs came from the BLS birth-death model which is a total guestimate of how many jobs were created from net new businesses.
  • The workweek actually contracted 0.3% in April and has now decreased or been unchanged in 3 of past 4 months. That is not telling me that employers are desperate to hire additional staff. Rising hours worked indicates that a company is in need of additional hands, but this decline in hours worked– add hours to translates into a loss of 373k jobs. If we add that number to the headline payroll number and you get a reduction of 110k in employment. Talk about lack of confirming data.
  • There may have been an estimated 263k new jobs, but the total aggregate hours worked declined 0.1%! This figure has declined in 2 of the past 3 months and has remained flat since the start of the year. That means the total hours worked in the economy for everyone hasn’t changed in 4 months – that’s not growth.
  • The headline unemployment rate dropped to 3.6% from 3.8% in March, the lowest since December 1969. That’s got to be good right?
    • Don’t forget that back in 1969, a recession started the very next month, in January 1970.
    • Last month’s drop in the unemployment rate came because of a 490k drop in the labor force. The total pool of available labor is today at the lowest level since May 2001! Remember that economic growth is the sum of growth in the labor pool and improvements in productivity.

We always look for confirming data points both within any particular report but also from similar reports. There is another employment report that didn’t get much attention Friday, the Household survey. This report has been around since the late 1940s and has a completely different methodology.

  • This report found a drop of 103k in employment in April and has declined in 3 of the past 4 months by a total of 300k.
  • Full-time employment dropped by 191k after 190k decline in March.
  • Those working for economy reasons, which means they cannot get a full-time job but want one, rose 155k after a 189k increase in March.

No confirming data on that booming jobs report is coming from the Household survey.

Another area of non-confirmation of the rumored US economy firing on all cylinders comes from the Federal Reserve’s Senior Loan Officer Survey. When times are good and folks feel confident in the future, they are more likely to borrow. So let’s take a look, shall we?

Mid-sized and large companies aren’t looking to borrow.

Small guys are also not in the market for a loan.

The consumer isn’t looking to buy a car.

Or borrow for anything else.

Still not convinced? Over 70 million Americans are hearing from the debt collector. With an estimated 247 million Americans aged 18 and older, that makes for roughly 28.3% of the population in financial distress – and this is when we are being told that things are bloody fantastic and the labor market is just fabulous. What happens when we do go into the inevitable recession?

Oh, wait, never mind. That isn’t going to happen, ever, at least according to this expert.

Between you and me, isn’t this the kind of thing you hear before it all goes pear-shaped?

The U.S. government is knocking for student loan

The U.S. government is knocking for student loan

While there are talks of student loan forgiveness on the 2020 campaign trail, the Treasury Depart is stepping up its game to collect on delinquent student loans. Data from the Bureau of Economic Analysis (BEA) points to disposable income once again coming under pressure during the first quarter of 2018. Paired with rising gas prices and renewed uncertainty over the global economy as well as the current state of US-China trade, we see the average consumer remaining in a tight spot.

It comes as no surprise to us that loan inquiries at consumer finance platform company LendingClub jumped significantly in the March 2019 quarter as consumers look to shore up their personal finance and manage existing debt levels. Disposable dollars for debt servicing take a bite out of consumer spending, which means our Middle-Class Squeeze investing theme remains an economic headwind. It does, however, bode very well for companies like Costco Wholesale, BJ’s, Walmart and Amazon that help consumers stretch their spending dollars.

Your rich Uncle Sam is calling in his chips.The U.S. government stepped up collections on delinquent student debt to $2.9 billion last year — or an average of $1,000 from 2.9 million former students and their cosigners, according to the Treasury Department. And the trend continues. In the first six months of fiscal 2019, which started Oct. 1, collections totaled $3.3 billion.

Source: U.S. Stepping Up Enforcement on Delinquent Student Loans – Bloomberg

Unity Biotech using molecular biology to target aging

Unity Biotech using molecular biology to target aging

As we have long said, thematic intersections can pave the way for pronounced transformation as two tailwinds change the existing landscape. As we continue to age and live longer, companies are examining new solutions to improve those aged lives. In the past, we’ve seen those take on a variety of forms, and now we are seeing it start with molecular biology. These dual waves that cross our Aging of the Population and Disruptive Innovators investing themes will be something to watch in the coming years.

Unity is among a small group of companies, including the Google health-care subsidiary Calico, that are attempting to harness advances in molecular biology to increase the human health span, the length of time that a person is healthy. The idea, David says, is not just to prolong life but to allow older people to live healthier lives. “We are not purely a senolysis company. We will also be exploring alternative mechanisms that can extend human health span,” he says.

The reaction from the pinstriped crowd in New York—which included analysts from Citigroup, Goldman Sachs, and Morgan Stanley—was respectful but muted. After all, only about 12 percent of drugs that enter clinical trials are successful, according to a 2018 report by the Tufts Center for the Study of Drug Development. And the science upon which Unity has based its approach is largely untested in humans; scientists have only recently begun to understand the links between senescence and the diseases associated with aging.

Osteoarthritis of the knee is a painful condition in which the cartilage between the bones wears away. In 2018 there were 725,000 knee replacements in the U.S. If successful, Unity’s drug for the condition could reduce the need for surgery while generating as much as $6.7 billion a year in revenue, according to a recent Goldman Sachs Group Inc. research note on the company.

Source: Unity Biotech’s Osteoarthritis Injections Could Fight Aging – Bloomberg