Category Archives: Monday Morning Kickoff

To help investors get ready for the trading days ahead, the Monday Morning Kickoff traces the key happenings of the previous week and looks ahead to the coming economic and earnings calendars for the new week.


We Kickoff 2Q18 With More Uncertainty, Which Means Only More Volatility

We Kickoff 2Q18 With More Uncertainty, Which Means Only More Volatility

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.

 

 

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 below). 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. Our Chief Macro Strategist Lenore Hawkins 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.

 

 

Monday Morning Kickoff: Uncertainty is the Name of the Game

Monday Morning Kickoff: Uncertainty is the Name of the Game

 

Last week marked the first day of Spring, which was welcomed with yet another nor’easter winter storm, as well as Fed Chairman Powell’s first post FOMC meeting press conference and renewed questions over user data and privacy following a new scandal for Facebook (FB). As Lenore Hawkins, Tematica’s Chief Macro Strategist, and I pointed out in our post-Fed meeting comments, the revised outlook calling for stronger economic growth and lower unemployment with no meaningful change in the Fed’s inflation forecast seems rather Goldilocks in nature and therefore rather unlikely. As Powell admitted, this consensus reflects the best forecast the Fed’s monetary policy committee based on what it sees today. As we know, the economy, much like investing, isn’t static – it’s not a photograph, but more like a drama that has many twists and turns.

The tone for the shortened week ahead us due to the Easter holiday weekend was set late last week amid tit for tat trade tariffs announced by President Trump and China, as well as the news that Trump begrudgingly signed the $1.3 trillion spending bill passed by Congress that would keep the government funded and open until late this year.

The bottom line is the stock market and investors have been grappling with the return of uncertainty and volatility in the market place. Last week certainly stoked those flames, which led the market to erase year to date gains. Many investors are likely reacting like a deer caught in the headlights, uncertain of where to turn next. The answer is in the data to be had and understanding which companies are better insulated from any potential trade war. People will still eat, consume electricity, need water and other inelastic goods and services in the short-term. That likely means those companies and ETFs, such as Utilities Select Sector SPDR ETF (XLU), will be safe-havens in the near-term.

As investors flock to these and other safe-havens, we expect the investment community will be assessing the potential impact of trade tariffs to be had – most notably disruptions and higher costs – on expected 2018 earnings. This could make for a very interesting 1Q 2018 earning season that kicks off shortly after the Easter holiday.

Here at Tematica, we’ll continue to listen to the and thematic signals as we once again build our shopping list for thematically well-positioned companies to buy at better prices. For more on thematic investing and why we see it as more powerful than the stale and tired sector investing, here’s this week’s Cocktail Investing podcast –How and Why the Thematic Approach Helps You Make Better Investments. For the Tematica Investing Select List, we’ll continue to favor companies sitting in the cross hairs of our investing themes that are poised to grow their businesses faster than the overall stock market.

While Thursday’s economic reports showed X, the new focus will be watching the economic data to be had in the coming months to see if it supports the Fed’s current forecast and what they may mean for a potential fourth rate hike this year. While the data comes in and we digest the latest trade developments from Washington, we’ll continue focus on data points for both our thematic tailwinds as well as headwinds and pain points. Much more on that, our thematic lens and our investing themes can be heard on last week’s Cocktail Investing podcast.

 

The economic and earnings data we’re watching this week

As I mentioned above, it’s going to be a shorter than usual week with the stock market closed in observance of Good Friday ahead of the Easter holiday weekend. In terms of economic data reports to focus on, there will be two we here at Tematica will be putting under the microscope.

The first one is the February Personal Income & Spending report. As Lenore and I have talked about quite a bit of late, consumer debt has continued to move higher with little improvement in wages for the majority of workers. In this report we’ll be looking for confirmation of that viewpoint and support for our Cash-strapped Consumer investing theme as well corresponding positions on the Tematica Investing Select List. To be more specific, if the February consumption figure comes in greater than income growth we could see more concerns raised for GDP growth in the coming quarters.

The second is the February figure for the PCE Price Index, which is the Fed’s preferred inflation gauge. Over the last few, the core PCE Price Index was up 1.5% year over year, well below the Fed’s 2% inflation target. Given the updated economic forecast the Fed served up last week, which was rather Goldilocks in nature, team Tematica will diligently watch for inflationary signs in the data that could quickly reignite the notion of four rate interest rate hikes this year. In and of itself, we do not see a major difference between three and four rate hikes this year, but odds are it would add the growing number of worries had across the stock market.

On the earnings front, we have a handful of companies reporting this week. From a thematic perspective, we see the results from McCormick & Co. (MKC) offering several signals over the health of the US consumer as well as confirmation for the rise aspect of our Rise & Fall of the Middle Class. With Nike (NKE) sharing this week it will expand its relationship with Amazon (AMZN), we’ll be looking to see how LuLuLemon Athletica (LULU) looks to position itself for our Connected Society tailwind. Other reports to watch this week for signals on our Affordable Luxury, Aging of the Population and Content is King themes include Restoration Hardware (RH), Walgreens Boots Alliance (WBA) and GameStop (GME).

 

 

Stepping back, the companies that report earnings this week and next will likely set the tone we’ll hear for 1Q 2018 earnings season. One central question that will be pondered concerns EPS expectations and whether the year over year 18%-20% EPS growth forecasts are still achievable. Pardon the cribbing of the old NBC tag line, but to me, that makes the earnings report to be had over these next few weeks must see reading, and I’ll be sharing my thoughts with Tematica Investing subscribers.

 

 

Thematic Signals

Each week we look for data points pertaining to our 17 investment themes, or as we call them Thematic Signals. These signals can either be confirming or they can serve to raise questions as to whether a theme’s tailwinds are strengthening or ebbing. Be sure to check out the Thematic Signals section of our website to read more about these stories and others we publish throughout the week.

 

Fortnite is the harbinger of more pain for the already struggling toy industry
Themes: Connected Society, Content is King

While it is rather clear to us why Toys R Us is filing bankruptcy and even Star Wars themed toy sales weren’t enough to help Mattel (MAT) this past holiday season, in-app purchases for the new iOS version of Fortnite are rather revealing. The recently launched gaming app, which sits at the center of our Connected Society and Content is King investing themes, typifies the shift toward gaming, and mobile gaming, in particular, that has changed the kinds of toys that children of all ages play with….

Read more here

 

BlackBerry rising from obscurity as it embraces our Safety & Security theme
Themes: Connected Society, Safety & Security

Unlike companies like GoPro and SNAP, which have failed to realize their entire business is a feature, not a product, Blackberry has embraced the fact that at its core feature is security, not connectivity in the form of a phone or smartphone.  This is perspective is reinforced with its recently announced deal with former rival Microsoft…

Read more here

 

The Rise of the New Middle-Class theme lets India air traffic take off and much more
Theme: Rise & Fall of the Middle Class

Month to month economic and industry data can fluctuate, which is why we look at the data over a longer term. While passenger air traffic spiked in February, we see the annual growth rate of more than 20% over the last several years reflecting the growing economy and rising disposable income that are drivers of our Rise of the New Middle Class investing theme. In addition to incremental spending on travel, other areas benefitting from this theme include leisure spending, housing and furnishings, premium branded apparel, higher end autos, restaurants and connected devices. In short, those devices and activities that denote some degree of status have been achieved…

Read more here

 

 

Looking Towards a Dovish Fed Meeting

Looking Towards a Dovish Fed Meeting

 

 

Last week was another week of up and down in the stock market that ended with the major market indices little changed. To sum it up, the market was treading water ahead of this week’s Federal Open Market Committee meeting as it digested the latest news emanating from Washington. Two weeks ago, we faced questions and uncertainty over Trump’s steel and aluminum tariffs and while those have since died down, last week brought a new round of uncertainty as the administration slapped sanctions on Russia as it also prepares tariffs and other anti-China measures and Trump claimed the US is at a trading disadvantage with Canada. At the same time, we had more departures from the administration, which could impede its ability to advance Trump’s agenda in the short-term, and special counsel Robert Mueller subpoenaing the Trump Organization as part of his investigation on Russian interference in the 2016 presidential election.

Much like it did in 2017, it’s looking like Washington will take center stage in 2018, with the only difference being the White House taking the spotlight rather than the Fed. Over the last several years, the stock market was heavily influenced by the Federal Reserve, but as we’ve seen in recent weeks Trump and his administration, inadvertently or not, have won the focus of market watchers.

The issue from an investing standpoint is one of uncertainty. From the tariffs to trade talk as well as the revolving door that is the administration, we’ve gotten a steady flow of uncertainty as of late. Here’s the thing – while the stock market is no fan of uncertainty, it appears that keeping opponents off-balance is a key part of Trump’s negotiating style, which likely means the stock market to be had in the coming months will be very different than the one we’ve seen over the last few years. Rather than the steady climb we experienced in 2017, we’re likely to face continued uncertainty as Trump looks to tick down his presidential agenda and more likely than not the stock market will remain on the edge of its seat.

 

Recent data should make for a dovish Fed monetary policy meeting

Offsetting the Washington news flow last week, we received several additional pieces of economic data that helped complete more of the puzzle that has been evolving the last few weeks. The result was the Atlanta Fed downgrading its GDP view for the current quarter to 1.9%. That’s down from the robust forecast of more than 5% at the start of the quarter.

Given the change we’ve witnessed in the Citibank Economic Surprise Index (CESI), these negative GDP revisions are far from surprising, and they are joined by cuts from JPMorgan (JPM) as well as Goldman Sachs (G). J.P. Morgan cut its GDP forecast from 2.5% to 2% for the current quarter, while Goldman Sachs reduced its call from 2.0% to 1.8%.

On last week’s Cocktail Investing Podcast, I talked with Lenore Hawkins, Tematica’s Chief Macro Strategist, about the importance of understanding the global macro economy and its impact on investing. As part of that conversation, Lenore shared several of the headwinds staring down the economy. Some of the GDP cuts can be attributed to rising debt levels that are constraining consumer spending, as we saw the overall disappointing February Retail Sales report.

At the other end of the spectrum, we are also starting to see the benefits associated with tax reform on business spending and an uptick in the larger economy. We saw confirmation of that in the February reports for Housing Starts and Industrial Production as well as the March readings for both the Empire Manufacturing and Philly Fed indices. Below the headline figures in those two March figures, we saw robust shipment and order activity. With a full plate of March economic data to be had in the coming weeks, should it mimic the tone of those two regional Fed indices, odds are we could see a reversal of course and some upward revisions in those recently cut GDP forecasts.

At the same time, inflation data in February has been coming in as expected and this likely leaves ample room for the Fed to offer a more dovish view exiting its next FOMC meeting, which is being held this week. At that meeting, it is widely expected that the Fed will embark on the first of its three much-telegraphed rate hikes, but it will be updated economic, inflation and monetary policy outlook from Fed Chair Powell that will capture investor attention. Given the mixed bag of economic data thus far, and the recent spat of inflation data, odds are the Fed will stick to its expected three interest rate increases forecast, although market watchers will be parsing the language for hints of a potential fourth rate hike.

Given that we are still relatively early in the year, and this is Powell’s coming out press conference as Fed Chief, odds are there will be little cage rattling to be had this week especially given the new air of uncertainty in DC when it comes to tariffs and trade. I also suspect the Fed is watching to see the impact of tax reform as well as monitor developments for Trump’s infrastructure plan.

What this likely means is Powell will offer an upbeat outlook for the economy, much the way his cheerleading predecessors have been on the topic, but mix in a “wait and see” tone for more than the already telegraphed three interest rate hikes in 2018. While this will likely lead to a sigh of relief from investors and drive the market higher in the short-term, the reality is it will only put those rate hike questions on hold for so long, especially if the economic data in 2Q 2018 picks up as we leave the winter storm filled current quarter behind.  This means, much like the movie Groundhog Day, we will likely relive the rate hike question again as we get ready to exit 2Q 2018, especially if the economic data picks up as we say adios to winter.

 

The economic and earnings data we’re watching this week

Compared to last’s full plate of economic data, which Lenore wrote about in The Weekly Wrap, we have a relatively short list of economic data to be had this week, which likely means even more attention will be placed on the outcome of the Fed’s monetary policy meeting, which we just tackled above. Following the Fed’s rate decision on Wednesday (Mar. 21), we’ll get the first look at how the global economy fared in March courtesy of the March Flash PMI readings from IHS/Markit.

With two weeks to until the end of the current quarter, and roughly a month until 1Q 2018 earnings season gets underway, there are no companies on the Tematica Investing Select List reporting, but there are several sign post companies for those holdings that are reporting. Included among them are: FedEx (FDX), ConAgra (CAG), Darden Restaurants (DRI), Nike (NKE) and Micron (MU).

 

What the AT&T-Time Warner antitrust trial could mean

Outside of the coming economic and earnings reports, I’ll be watching something else in Washington this week… something that could alter the future for AT&T (T), a Connected Society company that is looking to acquire Content is King Time Warner (TWX) in a bid to adapt its business model to these blurring Tematica investment themes.

Starting today, AT&T will square off against the federal government in an anti-trust trial that could shape how you get — and how much you pay for — streaming TV and movies. The view from the Justice Department is if AT&T and Time Warner are combined, consumers will end up paying more to watch their favorite shows be it on a TV, smartphone or Tablet.

From my perspective, the bigger risk to AT&T if the justice department is successful in blocking its merger with TWX is that it becomes a “dumb pipe” .. a dumb mobile data pipe, but still a dumb pipe. Over the years, we’ve seen companies such as Comcast look to surround its triple play offering (voice, data, cable) with a protective layer of content. At the same time, we are seeing Apple (AAPL) Facebook (FB), Amazon (AMZN) and Alphabet/Google (GOOGL) join Netflix (NFLX) in developing original programming. The thought is consumers will move to platforms for content they want to watch.

Is this actually happening?

Yes, and it is a central aspect of our Content is King investment theme. All we need to look at is TV ratings be it for the NFL, Oscars or even just regular weekly programming. At the same time, new reports reveal that Amazon’s move into original video programming is paying off as it pulled in some 5 million Prime subscribers between late 2014 and early 2017. During 4Q 2017, Netflix reeled in 8.3 new million subscribers, well above the 6.3 million Wall Street expected even as it began implementing price increases. Want to stream “The Man in the High Castle” on Netflix? Can’t because it’s an Amazon property.

Plain and simple, consumers want to watch the content they want where and when they want to on the device of their choice. That’s what AT&T is hoping to tap into — leveraging the rich content library at Time Warner as it serves as the connective pipe, be it wirelessly or not.

The outcome of this antitrust trial could shape the direction of content development to come across the entire market. If AT&T prevails, we are likely to see even more M&A transactions as other companies enter the fray or shore up their content offering. If the court doesn’t let the deal go through, then we will likely see greater spending on original content development inside of Apple, Amazon, Alphabet, Facebook and others. We’re already seeing Facebook open its purse strings as it gets ready to launch a News section on its Watch tab as soon as this summer. In an effort to build more meaningful engagement across its platform, Facebook is courting publishers to create news content for its Watch tab and stating that is will “will pay publishers up front to create the content.”

The bottom line is one way or another the media landscape is changing, the only real outcome to be had of this antitrust trial is the velocity.

 

Reading the Tea Leaves for the Fed’s Next Move

Reading the Tea Leaves for the Fed’s Next Move

 

We are a little over a week from the next Fed monetary policy meeting. This week in the Monday Morning Kickoff, we focus on the bevy of data coming at us before that meeting in order to guesstimate how the Fed will view the speed of the economy and inflation and what Fed Chair Powell will say as it relates to the velocity of interest rate hikes, inflation, tariffs and balance sheet unwinding over the balance of the year.

 

Roughly a month ago, a fresh dose of uncertainty and volatility was injected into the stock market with the January Employment Report and its wage data. Even as additional data revealed the hot wage data contained in that report reflected just 20% of the workforce, the market swings continued as new Fed Chair Jerome Powell’s testimony before Congress took center stage, only to be replaced over the last week by President Trump’s tariff announcements.

To say it has been a volatile ride these last few weeks has been an understatement, but as we exited last week we see that much as we suspected Trump’s tariffs have far less bite than feared. Combined with the February Employment Report’s better than expected job figures and its muted wage growth that fell short of expectations, those late week developments led the major stock market indices to move higher for the week in full, complete with a new record high for the Nasdaq.

As Tematica’s Chief Macro Strategist, Lenore Hawkins, shared in last Friday’s Weekly Wrap, there are reasons to be mindful when it comes to wage inflation. After digesting the February Employment Report, odds are the Fed is thinking that way as well.

 

The Signals That Could Indicate What the Fed Might Do Next

We are a little more than a week away from when the Fed will retake center stage as it kicks off its next monetary policy meeting on March 20th, which of course will include the usual press conference and Fed’s updated outlook for the economy, inflation and interest rates. In the meantime, this week I suspect market watchers will focus on the bevy of data coming at us with a keen eye toward the latest Industrial Production and inflation readings.

The goal, of course, in parsing through all of the data will be to guesstimate how the Fed will view the speed of the economy and inflation and what Fed Chair Powell will say as it relates to the velocity of interest rate hikes and balance sheet unwinding over the balance of the year. Our perspective here at Tematica remains the following – the economy is on firm footing, and thus far, while there are signs to be mindful of in regards to inflation, we continue to see several thematic factors keeping it in check.

Making it slightly more challenging, there are no Fed officials slated to give speeches or otherwise make the rounds in the coming days. Candidly, in my opinion, just having the data to sift through should offer a clearer picture of the economy and inflation as we will be spared from Fed head jawboning. As we have seen in the past, those officials tend to offer differing perspectives on the economy and monetary policy, which only serves to confuse the market and investors.

 

How Strapped is the Cash-Strapped Consumer?

Given the importance of the consumer spending on the economy, this week’s Retail Sales report for February bears watching closely, especially after the disappointing drop in the January data. That sequential drop reflected weakness in January auto sales as well as Building Material sales. Given the February weather, as well as the month over month drop in auto sales, we’re not looking for a pronounced recovery in the February data.

Solidifying my view is the lack of wage growth, continued increase in consumer debt and new data from the Federal Reserve that showed a sharp gap up in credit card charge-offs. Taken together, these three data points suggest the consumer is out over his and her spending skis. On a positive note, I do expect the February report to confirm the accelerating shift toward digital shopping, the cornerstone of our Connected Society investing theme.

We’ll also be parsing the food, beverage and food services data in the February Retail Sales Report given new data that shows restaurant sales and traffic were hit hard during February. With Kohl’s (KSS) teaming with German grocer Aldi to bring groceries into its stores — a move borrowed from Tematica Investing Select List resident Costco Wholesale (COST) — the restaurant could be in for more pain as consumers look for more affordable ways to eat at home, a key component of our Cash-Strapped Consumer investment theme. Lenore and I talked in more detail about this on last week’s Cocktail Investing Podcast as well as the growing importance of cyber security due diligence in M&A transactions. Once again, we see the implications of our themes bleeding over into new areas, and we don’t expect it to stop anytime soon.

In addition to the February readings on Industrial Production and inflation, this week also brings us the February Housing Starts & Building Permits report. Given the current lumber shortage that Lenore and I discussed on last week’s Cocktail Investing Podcast, as well as the impact of harsh weather across the country over the course of the month we could see a softer print. Given the weather we have seen in the East over the last 10 days, I’m not expecting a big rebound when we get the March data. With fewer housing starts, plus higher lumber costs, odds are this means we should expect to see higher home prices in the February and March New Home Sales Reports. That also means we’re less likely to see new household formations in the near-term as more consumers, especially Cash-strapped Consumers, are priced out of the housing market. Sorry mom and dad, it looks like those Millennials will be with you a bit longer.

 

March Data Will Start Coming in Like a Lion

In addition to that bevy of February data, we have several pieces of March data coming at us as well — the Empire Manufacturing and Philadelphia Fed indices for the month. We’ll see if those reports echo the moderate tone revealed this week in the latest Fed Beige Book that I discussed on The Intelligence Report with Trish Regan on Fox Business last week.

While we have no companies on the Tematica Research Investing Select List reporting over the next several weeks. Therefore, we will be watching results this week from a number of retailers and restaurant companies for comments on consumer spending as well as shifting consumer preferences that are a part of our Food with Integrity investing theme. Among the reports we’ll be digging through are:

  • Sears (SHLD), Buckle (BKE), Dollar General (DG), The Children’s Place (PLCE) and DSW (DSW) to gauge the continued pain in brick & mortar retail.
  • The same is true with Dick’s Sporting Goods (DKS) and Hibbett Sporting (HIBB), but I’m also curious to see how Amazon’s (AMZN) relationship with Nike (NKE) as well as Nike’s own direct to consumer efforts are hitting these sporting goods stores.
  • Del Taco (TACO), Noodles & Co. (NDLS), and Papa Murphy’s (FRSH) as well as other restaurant chains to see if and how they are overcoming the impact of higher minimum wages this year.
  • Adobe Systems (ADBE) will inform us how cloud adoption is proceeding so far this year, and that’s something all shareholders of Amazon should be watching.

 

You Will Be Disappointed if You Hoped Volatility Was Going to Be Short-Lived

You Will Be Disappointed if You Hoped Volatility Was Going to Be Short-Lived

With three trading days left in the month of February, we can easily look back over the last four weeks as a sea-change in the stock market. The change came with the return of volatility with a vengeance with wide intra-day swings that through the end of last week led the market lower from the January 26th peak. As I shared on last week’s Cocktail Investing Podcast, my view is between now and the Fed’s next FOMC meeting on Feb 20-21 — a meeting that ends with the Fed’s updated view on the economy, GDP and Chairman Powell’s first press conference — day to day the stock market will be based on the new and data of the day.

This week we’ve got a full calendar of data coming at us, and given that investors are currently in the mode of “good news for the economy is bad news for the market”, it means those who are hoping the recent bout of volatility was going to be short-lived… you’re going to be disappointed. Now, let’s breakdown what’s on tap this week as we exit February and enter the last month of the current quarter.

 

The Economic Week Ahead

As we exit February and enter March, we get the usual end of one month, start of the next data. It likely means we’ll be seeing more than a few adjustments made to the Atlanta Fed’s GDPNow and the New York Fed’s estimate that currently sit at 3.2% and 3.1%, respectively. Those levels are compared to the 4.2% and 3.09% that were published as we exited January — we’ll just put the 5.3% figure Atlanta published on February 1st to the side as the outlier it clearly was.

Among the indicators to be digested by economists and market watchers as they look to determine what the Fed will say in a few weeks, we have several January data points to be had including the Chicago Fed National Activity Index, New Home Sales, Durable Orders, Personal Income & Spending, and Construction Spending. Given the record low temps recorded in January, odds are the some of these figures will be impacted.

For us here at Tematica and our Cash-Strapped Consumer investing theme, we will be pouring over the January Personal Income & Savings data. While recent data streams have revealed little wage growth for roughly 80% of workers in January, the report will bring some context, not only to January spending beyond the monthly retail sales figures, but also offer the latest view on the consumer savings rate. As a reminder, the December reading was at the lowest level in over a decade, something we view as worrisome given other data showing a continued rise in consumer debt that is poised to sap consumer spending as the Fed inches interest rates higher in the coming quarters.

Turning to the oncoming February data, we’ve got the readings for Consumer Confidence, the ISM Manufacturing Index, Auto & Truck Sales and several regional Fed indices. In keeping with our Economic Acceleration/Deceleration theme, the one February indicator we’ll be digging into deep will be the ISM Manufacturing Index, not only for what it says about the tone of the domestic economy, but also about the latest in input prices and inflation.

Amid all of this, we also have new Fed Chairman Jerome Powell testifying before the House of Representatives’ Committee on Financial Services in the Federal Reserve’s Semiannual Monetary Policy Report to the Congress on Wednesday (Feb. 28). Normally these testimonies tend to follow the Chairman’s established playbook, but this will be Powell’s first outing and comes BEFORE his first Fed press conference. I suspect many, including us here at Tematica, will be parsing his language and dissecting his meaning to better understand what is likely to be had from Powell and the Fed on Feb. 21.  As much as we would like to hear the new Fed Chair communicate in plain English, odds are he will mirror his predecessors and speak in a style that is as clear as mud.

 

 

The Earnings Week Ahead

The last few weeks have seen several hundred companies report their quarterly earnings. We’re set for another onslaught to occur yet again this week with more than 575 such reports coming at us. While we’re essentially down to the December quarter end stragglers, we’ll begin to hear from a growing number of retailers this week including Macy’s (M), Chico’s FAS (CHS), TJX (TJX), Kohl’s (KSS), Gap (GPS), Nordstrom (JWN), Restoration Hardware (RH), J.C. Penney (JCP) and Foot Locker (FL). Based on last week’s earnings report from Walmart (WMT), which cited rising freight costs and the need to further invest to keep Amazon (AMZN) at bay will weigh on its margins, we could be in for a rocky set of reports if those retailers offer a similar outlook as I suspect they will.

Retailers aside, we have a number of companies reporting this week whose commentaries will offer valuable insight to our investing themes. Here’s a short list of the companies and the corresponding themes we’ll be watching:

  • Broadcom (AVGO), Fitbit (FIT) – Connected Society
  • Freightcar America (RAIL) – Economic Acceleration/Deceleration
  • NutriSystem (NTRI), Hostess Brands (TWNK) – Fattening of the Population
  • VeriFone (PAY), Square (SQ) – Cashless Consumption
  • Toll Brothers (TOL) – Affordable Luxury
  • com (ALRM) – Safety & Security
  • Dycom (DY) – Disruptive Technologies
  • Anheuser-Busch InBev (BUD) – Guilty Pleasure

 

 

Thematic Signals

As if this week wasn’t busy enough, Mobile World Congress 2018 kicks off today Feb. 26 and runs through the end of the week. Why is this annual event, which is a showcase for mobile technology one big thematic signal?

On the surface, the event will once again focus on the growing number of connected devices, and I suspect several new flagship models for smartphones will be announced from the likes of Samsung, LG, Huawei and others. We’ll also get a hefty dose of “techy talk” on 5G as carriers like AT&T (T), Verizon (VZ), Sprint (S) and T-Mobile USA (TMUS) they will launch commercial 5G networks in 2019.

With each next-generation mobile technology we’ve seen a dramatic expansion in what can be done wirelessly. Way back when in the 2G world it was voice and text. With 3G we saw the debut of the true mobile internet and the start of apps. With 4G/LTE the app transformation continued and the emergence of streaming content, both video and music ranging from video calling to watching the latest TV or film to bopping along to Versace on the Floor by Bruno Mars as you walk down the street (Not that I’ve ever done that).

Faster network speeds and greater bandwidth have been a key enabler and the result has been a near quenchless thirst for data and content. So much so that we see extreme user frustration when our smartphones drop down to 4G or even 3G from an LTE connection. One would think anarchy was about to ensue. 5G networks with far faster data speeds compared to 4G/LTE are poised to push the mobile boundaries even further.

At Mobile World Congress 2017, Samsung showcased its 5G Home Routers, which achieved speeds of up to 4 gigabits (GBs) per second – that’s 500 megabytes per second. Translated into real-world speak that would let you download a 50 GB game in under two minutes, or a 100 GB 4K movie in under four minutes.

How does that stack up against the average internet speed in the US? As of 2016, that speed was 55 megabits per second, which translates to a woeful 6.5 megabytes per second.

This means 5G networks will more than likely foster another sea change in what, how, where and perhaps even why mobile technology is used. Applications already being bandied about include the Internet of Things with applications ranging from connected farms and smart cities to the remote control of heavy machinery and enabling autonomous vehicles.

Will we see more cord cutting as 5G networks go mainstream and even more mobile content consumption? My view is a resounding YES. That’s why 5G is part of our Disruptive Technologies investing theme, but it will also add to the tailwind associated with our Connected Society theme as well. Realizing the opportunities to be had, there are several companies on the Tematica Investing Select List that will see their businesses benefit from the deployment of 5G from an infrastructure as well as chipset perspective – if you want a device to connect to the network, you can’t have one without the other.

I’ll be sharing my take on the announcements coming out of Mobile World Congress this week as well as which companies are likely to be in trouble as 5G takes hold.

 

 

What’s Next for the Markets After Last Week’s Turmoil?

What’s Next for the Markets After Last Week’s Turmoil?

 

There is no other way to say it — last week was a mother of a week for US stocks. We saw that reflected in the domestic market indices, which hit correction territory, and in our Tematica Investing Select List. Team Tematica has been on a number of programs, both TV and radio, as well as our own Cocktail Investing Podcast, sharing our views on the whys behind the market’s tumble into correction territory. We also published a rather lengthy note detailing what’s behind the market’s indigestion.

Exacerbating the resetting of expectations between economic growth, interest rates and inflation, stocks are also being hit by the lack of cash on the sidelines and margin debt that has been at record high levels. This lack of cash helps explain the magnitude of the dip, which is only amplified by institutional selling to raise cash in order to buy stocks at better prices. At the same time, margin calls are also prompting selling. Talk about a riptide curl of negativity being added to things.

Here’s the thing, with the economy on firm footing, odds are we are seeing just a correction. In our view the correction, while not pleasant in the moment, is a healthy thing for stocks given the meteoric rise and stretched valuations they had coming into 2018 due to a firming economy and “hopium” associated with tax reform. That said, we’ll continue to mine the data, especially next week, which adds another view on inflation.

What are we looking for to determine what’s next for the market? Great question, let’s talk about that and more…

 

On the Economic Front

After a week that had less than a handful of key economic reports, we saw the Atlanta Fed’s GDP Now forecast come back down to reality as its current quarter GDP forecast was revised down to 4.0% from 5.4% on Feb. 1.

 

By comparison, on Friday the NY Fed adjusted its NowCast forecast for the current quarter to 3.35% from 3.22% on Feb. 2. We see that 3.3%-4.0% range as favorable compared to the 4Q 2107 GDP print of 2.6%, but we also know we are only now starting to get data that will shape current quarter expectations. For our greater thoughts on last week’s economic data, we suggest you devour last Friday’s Weekly Wrap by Tematica Chief Macro Strategist Lenore Hawkins.

As we mentioned earlier, the domestic stock market dropped into correction territory as investors reset expectations to account for a combination that includes a firming economy, the specter of rising inflation, and rising bond yield. On the heels of that correction, the economic data to be had this week will either stoke the flames of concern or pour some cold water on them. I say this because the slate of data this week includes the January figures for both CPI and PPI, which will be given a thorough going over to determine if we are indeed seeing inflation catch fire.

We’ll also get the January Retail Sales report, and we once again expect to see confirmation of our Connected Society investing theme as digital shopping takes share from department stores and other brick & mortar retailers. Do we think all retailers are headed for trouble? Nope, and one that has been on the Tematica Investing Select List is Costco Wholesale (COST), which once again delivered impressive same-store sales figures for January.

As we put Valentine’s Day 2018 behind us mid-week, we’ll get the January Industrial Production and Capacity Utilization report. We expect to see a pickup in utility activity given the cold temperatures that plagued much of the country, but the real focus will be the level of manufacturing activity as we look for confirmation on the speed of the economy. The capacity utilization figure, which has been edging higher in recent months, is still below levels at which companies have historically opened the purse strings and added capacity. If we don’t see a meaningful move in that figure in the coming months, it could call into question the willingness of companies to invest in property, plant and equipment with expected tax reform benefits.

Rounding out the week, we’ll get the latest Housing Starts & Building Permits figures for January, and we’d be more than a little surprised if the results were not impacted by the record low temps across the country much like they did in December. As the week closes, we’ll also get the first indications of how the domestic economy is fairing in February with the Empire Manufacturing Index as well as the Philly Fed Index. Inside both of those data sets, we’ll be breaking down the month over month comparison for not only shipments to gauge the strength of the economy, but also prices paid to see if inflation is picking up as the herd suspects.

 

On the Earnings Front

Last week we saw the peak of earnings reports for the current earnings season, coming in at more than 530, but the coming one will bring only a modest decline as we have nearly 475 companies reporting. That makes this week the second busiest week for corporate reporting this earnings season, and there are a number of industry leaders that will be taking center stage in the coming days – PepsiCo (PEP), Kraft Heinz (KHZ), Applied Materials (AMAT), Coca-Cola (KO), and Deere (DE) to name a few.

From a thematic perspective, in addition to those reports that will offer data points for our Disruptive Technologies and Food with Integrity investing themes, we’ll be mining for data from the Chegg (CHGG), Equinix (EQIX), VF Corp. (VFC), and Shake Shack (SHAK) earnings report as they related to our Tooling & Re-Tooling, Connected Society, Affordable Luxury and Fattening of the Population themes, respectively.

As we exit the week and the pace of corporate earnings begins to abate in a more meaningful way, we’ll be revisiting the current consensus expectations that call for the S&P 500 group of companies to grow their collected EPS by more than 17% year over year in the current quarter and by 17.4% for all of 2018. Those findings will help determine if there is more downside to be had. Currently, the S&P 500 is trading at 16.6x expected 2018 EPS, that well below the 20.2 x the index finished out 2017 and compares to the 16.8x multiple the index has averaged over the 2002-2017 time frame.

 

Thematic Signals

Each week we look for data points pertaining to our 17 investment themes, or as we call them Thematic Signals. These signals can either be confirming or they can serve to raise questions as to whether a theme’s tailwinds are strengthening or ebbing. Be sure to check out the Thematic Signals section of our website to read more about these stories and others we publish throughout the week.

 

With soda getting left in the cold, PepsiCo trots out Bubly sparkling water
Foods with Integrity

Over the last decade, sugary soft drink volumes have been under pressure, but until recently soda companies have seen their case volumes bolstered by diet beverage that incorporate alternative sweeteners to deliver zero calories. With consumers becoming more health conscious as well as preferring healthier and good for you ingredients as part of our Food with Integrity investing theme, diet soda case volumes have also come under pressure and this is pushing companies like Coca-Cola, Dr. Pepper Snapple, Cott Corp., and PepsiCo to deliver new formulations and offer healthier alternatives. One of the biggest pushes is in flavored sparkling water, and now PepsiCo is joining the fray with Bubly, going head to head with not only La Croix, but also Coke’s line of flavored sparkling water under its Dasani brand.

Read more here

 

Our Scarce Resource theme once again drives food inflation
Scarce Resources, Cash-strapped Consumers

Aside from uncovering data points that support our thematic perspective, we also like to connect the dots between our themes as well, given the potential for one theme to be a catalyst for the other. We’ve seen that in the past with droughts — a recurring aspect of our Scarce Resource theme — and we are seeing it once again as a current drought as this article from The New York Times details…

Read more here

 

Politics and Technology Impact Gun Sales
Disruptive Technologies, Safety & Security

The thematic investing approach we utilize at Tematica Research focuses on identifying sustainable market shifts that come about due to shifting economics, demographics, psychographics, technologies, mixed with regulatory mandates and other forces. This week, we see all of these factors wrapped up in our Safety & Security investment theme in a decline in gun sales, as reported by Bloomberg…

Read more here

 

 

Investors: Just Don’t Overthink It Like the So-Called “Experts”

Investors: Just Don’t Overthink It Like the So-Called “Experts”

 

 

Last week we closed the books on January and saw volatility rear its head as the earnings bonanza continued while the economic data to be had led yields higher knocking stocks in the proverbial bread basket. In our view, the move lower after one of the strongest starts of the year ever for stocks is poised to take some froth out of stock prices creating opportunities and leaving stocks not quite as priced to perfection as they were several days ago.

We also had President Trump’s first State of the Union Address, in which he unwrapped his $1.5 trillion framework to rebuild the US’s crumbling infrastructure. We also had the January FOMC meeting, the last under outgoing chair Janet Yellen, with a dovish monetary policy statement. All that and we learned the worries over Apple and the iPhone X were once again blown out of proportion. More on all of that we covered in Friday’s Weekly Wrap.

With the 2017-18 NFL season and the Super Bowl in the books, let’s kickoff the first full week of February and take a look at what’s on tap in the coming week…

 

On the Economic Front

On the heels of last week’s data-filled week, the Atlanta Fed GDP Now’s forecast for GDP in 1Q 2018 catapulted to 5.4% from 4.2% at the start of last week.

That forecast reflects the robust January ISM Manufacturing Index as well as construction data that was published last week. We’d be remiss that it stands significantly higher than the 3.09% GDP forecast published by the NY Fed and 2.6% that is derived from The Wall Street Journal’s Economic Forecasting Survey.

 

 

As much as we would like to have some faith in the Atlanta Fed’s forecast, the reality is it has a firm track record of missing to the upside with its forecasts. The most recent example was its last 4Q 2017 forecast that looked for GDP of 3.4% — we all know how far off the mark that was. It prompts us here at Tematica to recall a quote by the famous author Habeeb Akande: “The more you overthink the less you will understand.”

Also last week, the Fed held its last FOMC meeting under Janet Yellen’s leadership. The Fed stuck to the playbook it has operated under over the last few quarters – growth is improving, the Fed will continue to be on the lookout for inflation, and it looks to boost interest rates three times this year. Exiting last week, however, we saw a step in the market’s assessment the Fed could boost rates up to four times this year. As more data comes in over the coming weeks, we’ll look to the Fed’s March meeting, which will be its first under new Fed head Powell and include an updated, multi-year economic forecast. If we see meaningful upward moves in that outlook, we could see the Fed begin to signal that more than three rate hikes could be on the table before year-end.

That means team Tematica will be scrutinizing the data to be had this week and in the coming ones to bet an accurate bead on the pace of the economy. This week we have a relatively lite flow of economic data that includes the ISM Services Index for January as well as the December Trade Balance and JOLTS reports. In my view, the report to watch this week will be the December Consumer Credit report. We’ve seen a ramp up in consumer credit card debt over the last several months, and recent data shows non-supervisory wages were essentially unchanged for the 12-months ending December 2017. With interest rates poised to inch higher in 2018, we continue to see a potential disappointment in the consumer’s ability to spend as he and she struggles with increasing debt service costs. Let’s remember, consumer spending was a key driver in the 2.6% GDP print for 4Q 2017 and the risk is the consumer is not quite the tailwind for the economy that it has been or people expect it to be.

 

On the Earnings Front

While we get a respite on the economic data front, there is no slowdown on the earnings front this week as the number of companies reporting gaps up to more than 525 from 443 last week. Among that sea of reports, here’s a short list of the ones that I’ll be focusing on:

  • Apple (AAPL) suppliers Cirrus Logic (CRUS) and Skyworks Solutions (SWKS) to get confirmation that iPhone shipments are poised to dip 3%-5% year over year in the current quarter, a far cry better than the media was suggesting over the last few weeks.
  • Does Cummins (CMI) see an accelerating global economy that is driving a pickup in the heavy truck market that is currently seeing substantial hikes in spot freight prices?
  • Are advertising rates at Snap (SNAP) going the way of Facebook (FB) or more like Alphabet (GOOGL), and is SNAP keeping pace with user additions at Instagram?
  • How does the latest Star Wars film and a robust slate of Marvel and Pixar movies fit into Disney’s (DIS) proprietary streaming video service? Also, have continued cost reductions at ESPN finally right-sized that business?
  • Will T-Mobile USA (TMUS) continue to win postpaid customers from its mobile rivals and is there any acceleration in its 5G network timetable?
  • Is one-time high flier Chipotle Mexican Grill (CMG) as done as the growing consensus believes?
  • What is the vector and velocity of the recently launched Overwatch e-sports league, and what does it mean to Activision Blizzard’s (ATVI) bottom line?

 

 

Thematic Signals

Each week we look for data points pertaining to our 17 investment themes, or as we call them Thematic Signals. These signals can either be confirming or they can serve to raise questions as to whether a theme’s tailwinds are strengthening or ebbing. Be sure to check out the Thematic Signals section of our website to read more about these stories and others we publish throughout the week.

 

Alibaba hopes to find a silver bullet when it comes to the aging population

Aging of the Population

Over the next 12 years, all of the baby boomers will have moved into the senior generation, resulting in a major structural shift in demographics. From 2010 to 2030, the percent of the population over 65 will increase from 13 percent to 19 percent while the percent of the U.S. population aged 20-64, the primary working years, will decrease from 60 percent to 55 percent.

We in the United States are hardly alone in this demographic shift. Canada, Japan, China and most of Europe have an even higher percentage of their populations in the older age brackets.

Read more here

 

Cash-strapped consumer want more digital coupons

Cash-strapped Consumer, Connected Society

In a recent Thematic Signal post, we shared that Apple (AAPL) is making inroads with Apple Pay as smartphones account for a growing percentage of digital commerce. We lamented on the lack of loyalty program support in Apple Pay, but it is becoming increasingly clear that shoppers want digital couponing. Currently there are third party apps that “clip” digital coupons, but wouldn’t it be convenient to have all those coupons alongside your payment cards in Apple’s iOS Wallet… especially if it were tied into Reminders with a “use by” date. Maybe in iOS 12? Such a move by Apple.

Read more here

 

 

Apple playing the long-game with Apple Pay

Cashless Consumption

The current headlines are rumor mongering over iPhone X production cuts for the first half of 2018, but Apple continues to improve the stickiness of iPhone by tapping into the exploding world of mobile payments with Apple Pay. Initially off to a slow start, Apple Pay is now reportedly accepted in 50% of US retail locations… of course, accepted at doesn’t necessarily equate to “used at.” That said, with smartphones and tablets account for 25% of e-commerce transactions in the U.S. it looks like Apple is continuing to play the long game.

Read more here

 

After a Disappointing GDP Print, Investors Take Stock of the State of the Economy

After a Disappointing GDP Print, Investors Take Stock of the State of the Economy

 

Last week was a busy one, as the pace of corporate earnings picked up considerably. President Trump spoke at the World Economic Forum in Davos ahead of this week’s State of the Union Address, and we received our first look at how the domestic economy fared in January. For team Tematica, last week meant attending the Inside ETFs 2018 conference in Florida, not a bad thing given the recent cold snap that hit the country. The conference was filled with meetings and conversation ranging from Bitcoin to new ETF investment strategies, more food than one can possibly eat and an insane amount of walking. My feet are only now recovering.

Cocktail Investing podcast from the Inside ETFs Conference from Hollywood Florida

Among the many conversations had at Inside ETF 2018, we had the pleasure of speaking with Doug Yones, the Head of Exchange Traded Products at NYSE and Jamie Wise at Periscope Capital, which is responsible for the BUZZ Indexes and BUZZ US Sentiment Leaders ETF (BUZ). We shared these conversations, which among other things touched on the rapid growth of the ETF industry, how it’s maturing and innovating as we celebrate the 25th anniversary of the SPDR S&P 500 ETF Trust (SPY), and why it’s likely to continue to take in assets in last week’s Cocktail Investing podcast. If you missed it, you can listen to it here.

Now let’s tackle the week ahead…

 

On the Economic Front

Following Friday’s disappointing December quarter GDP print of 2.6%, investors will be taking stock of the state of the economy in the current quarter. As we wrap January and move into February, this means examining the January data that will be coming our way over the next few weeks to corroborate the improving outlook signaled by the January Flash PMI data from IHS Markit. One of the key reports this week will be the January ISM Manufacturing Index, due out on Thursday.

Also, on the docket this week, we have the December Personal Income & Spending and Construction reports as well as several looks at job creation in January before Friday’s January Employment Report. Inside the Employment Report, we’ll be looking at wage data, following the recent report that showed little progress in non-supervisory wages year over year in December. Let’s remember too that several states hiked minimum wages in January, and a growing list of companies have more recently announced wage hikes, which should show up in the February Employment Report. We expect some positive year over year comparisons, but we are not expecting the January findings to ignite inflation concerns. We’ll continue to watch the coming data to gauge if wage-related inflation does being to heat up.

We expect some disruption to rear its head in the December construction report due out on Thursday, owing to the severe cold and winter storms that hit late in the month. We suspect that by the time that report hits, however, the investment community will already be looking forward given what is expected to be unveiled on Tuesday at President Trump’s first State of the Union Address. Much like at the World Economic Forum this week, we expect the President to signal much progress on the economy, bringing jobs back to the U.S., cutting regulation and the benefits to be had from tax reform. There may be some new details that emerge on those fronts, but odds are we’ve heard most of it already.

The new expected item to be shared during the State of the Union address will be the president’s $1.7 billion rebuilding US infrastructure framework. Investors have been waiting for these details to emerge, which will address the pain point that is the sad state of the nation’s roads, bridges, tunnels, dams, ports, airports and the like. Coming off tax reform, as well as the short-lived government shutdown, we see this next agenda item creating jobs while driving revenue and profits for companies poised to benefit from related infrastructure spending.  The question yet to be answered in all of this is how the rebuilding and upgrading will be paid for? Needless to say, we look forward to learning what more is to be had on Tuesday night.

 

On the Earning Front

As I mentioned above, the pace of corporate earnings picked up last week but in the coming days it will be akin to drinking from a fire hose as more than 425 companies will deliver their most recent set of earnings reports. As a guide, the frequency of earnings beats and outlook increases picked up as last week wore on, due in part to tax legislation benefits. I expect that same trend to continue this week leading the stock market to melt up even further, stretching historical metrics even further as this happens. Lenore Hawkins, Tematica’s Chief Macro Strategist, detailed the richness of these metrics in Friday’s Weekly Wrap, which you can find here.

Exiting the week, we’ll have a statistically significant number of companies in the S&P 500 that will have reported, and this should give us a firm view not only 2017 EPS for the collected 500 companies but do the same for 2018 as well. Current expectations have S&P 500 earnings rising to $153.08 in 2018, up from $130.33 in 2016, and based on Friday’s market close the S&P 500 is trading at just under 19x on those 2018 EPS expectations. In our view, while we expect the market to melt up further, it means it is increasingly priced to perfection. Our key concern remains the transformation of lower tax rates into greater spending given consumer debt levels and the lack of skilled workers at a time when interest rates are rising following a boom in corporate debt over the last several years. We will continue to be vigilant with the Tematica Investing Select List.

Now, amid the sea of earnings to be had this week here are the ones that we’ll be focusing on:

  • Monday, January 29: Lockheed Martin (LMT) and J&J Snack Foods (JJSF)
  • Tuesday, January 30: Brinker (EAT), CNH Industrial (CNHI), Corning (GLW), McDonald’s (MCD), Paccar (PCAR), SAP SE (SAP) and Electronic Arts (EA)
  • Wednesday, January 31: Boeing (BA), Ericsson (ERIC), AT&T (T), Facebook (FB), Microsoft (MSFT), PayPal (PYLP), Qualcomm (QCOM),
  • Thursday, February 1: Altria (MO), Hershey Foods (HSY), MasterCard (MA), Ralph Lauren (RL), Alphabet (GOOGL), Amazon (AMZN), Apple (AAPL), Visa (V)
  • Friday, February 2: Estee Lauder (EL), Honda Motor (HMC), Sony (SNE).

 

 

Thematic Signals

Each week we look for data points pertaining to our 17 investment themes, or as we call them Thematic Signals. These signals can either be confirming or they can serve to raise questions as to whether a theme’s tailwinds are strengthening or ebbing. Be sure to check out the Thematic Signals section of our website to read more about these stories and others we publish throughout the week.

Normally, we share several signals, but this week I wanted to spend some time on a recent announcement by thematic investing poster child Amazon (AMZN) – the opening of its first Amazon Go store. This new concept store from Amazon leverages aspects of our Disruptive Technologies and Cashless Consumption investing themes to bring about a “truly cashless grocery experience” with no checkout line. We here at Tematica could not be more thrilled from a thematic and personal perspective.

As the Chicago Tribune shared,

“No carts, no lines, no waiting (unless you count the loiterer in the soda aisle — he’ll still be there.) The store accurately inventories what you take and charges your Amazon account, efficiently delivering an electronic receipt after you’ve left. Like most things that Amazon does, this smells like inevitability. We know, as surely as we knew the day that first Amazon box showed up on the doorstep, that the future of shopping has arrived.”

 

To see an example of Amazon’s “Just Walk Out” technology that powers Amazon Go and how the technology works, watch this video.  Pretty impressive.

For now, Amazon Go is just a pilot store, but let’s remember the retail footprint Amazon acquired with its Whole Foods acquisition, which should factor in its growing list of Amazon book stores, kiosks and pop-up shops. To us, the real question is whether Amazon will leverage this “Just Walk Out” technology for its own uses across existing and future brick & mortar locations, or, once honed and refined, will it replicate what it did with Amazon Web Services – make its technology platform available for other companies to use, driving revenue and high margins in return at Amazon?

Time will tell, and the implications to be had are big, especially for the 3.5 million cashier jobs in the U.S. currently —making waves into our Tooling & Retooling investment theme. One way or another, Amazon is poised to serve up further disruption and that is one of the reason it is a core holding on the Tematica Investing Select List.

 

The one risk percolating in the back of investors’ minds

The one risk percolating in the back of investors’ minds

One of the central questions exiting last week was would the federal government shut down? Early Saturday morning we had the answer, and yes it was shut as the deadline to fund the government passed without a new spending bill. It’s being reported that talks are continuing, but as I write this early Sunday morning, certain parts of the federal government are set to remain closed heading into the work week.

Candidly, it seems like a game we’ve seen before — political chicken, and the word to focus on amid all of the cable TV finger pointing is “duration.” How long will the federal government be closed?

Answer: Right now, no one is sure, but as we all know, the longer it is closed the odds are a minor disruption becomes a larger one.

Here’s the thing, if we used the US stock market as a barometer for the shutdown, one would have thought there was little to no chance of it happening.

Why? Because US stocks continued their melt up, setting some new record highs in the process as investors focus on the EPS hikes to be had following tax reform and prospects for more Wall Street strategists to boost their price targets for the S&P 500. We’ve seen some of this already, and with the pace of 4Q 2017 earnings quickening this week and next, odds are we will see much more of it.

 

 

My view remains that in the near-term the market will continue to melt higher, and with the CNNMoney Fear & Greed Index holding steady last week at “Extreme Greed”, up from “Greed” a month ago, I suspect many investors will welcome it. As that happens, and we see already stretched valuation metrics become even more so, I’ll be watching for confirming signs for one risk that is percolating in the back of this investor’s mind — will the impact of tax reform on the economy live up to expectations being set given consumer debt levels and dearth of skilled workers when the stock market is increasingly priced to perfection. For more on those stretched valuation, I’d suggest checking out last week’s Cocktail Investing podcast.

Now, here’s what I’ll be focusing on in the week ahead.

 

On the Economic Front

Last week’s December reports for housing starts and industrial production served as a reminder of the impact to be had from the severe cold and winter weather. Odds are this will have some impact in the December data for Existing Home Sales as well as New Home Sales that we’ll get later this week. With wintry conditions continuing into January, we expect to see some further disruption in construction and we’ll be listening for confirming commentary

This week also brings the first print for 4Q 2017 GDP, which according to the Atlanta Fed’s forecast, is expected to clock in around 3.4%. The usually more conservative NY Fed is calling for an initial number of 3.9% for the quarter, and both of those figures compare to the 3.1%-3.2% notched in 2Q-3Q 2017.  As we wait for what is likely to be an upbeat report, we’d remind readers that the devil for this report is in the details, and that means digging below the headline figure. We’ll be ready for that.

Helping add some context to that GDP report will be the December durable orders report. Following the flat performance in the November data, we’ll be eyeing the December figure for core capital goods as well those for the coming months to get a read on the degree to which companies are actually investing incremental tax reform dollars in their businesses vs. using the incremental cash flow to fund dividend hikes and stock repurchase programs.

All that, and we also have the World Economic Forum meeting in Davos, plus the Flash PMI January figures for the U.S., eurozone and Japanese economies. We’ll be scrutinizing what’s said as well as what isn’t with regard to global monetary policy and trade in addition to its impact on the dollar.

 

 

On the Earnings Front

Next week more than 300 companies reporting earnings this week, a dramatic pick up from the 85 that reported over the last four days of trading. To put that in perspective, ending last week we heard from just over 10% of the S&P 500 and in the coming days, we have far more reporting quarterly results, discussing the tone of the current quarter and offering their view on tax legislation benefits to be had.

Do we expect all those to be a blustery as Connected Society company Apple (AAPL), last week shared that over the next five years it expects to contribute $350 billion to the US economy, create 20,000 jobs in the process, and bump up its Advanced Manufacturing Fund to $5 billion from $1 billion? No, but again, all those upped EPS forecasts will have a cascading effect on market expectations and I’m looking to determine the degree.

Among those more than 300 companies issuing quarterly results this week, here are some of the ones that I’ll be focusing when it comes to the Tematica Investing Select List:

  • Netflix (NFLX) to assess international streaming growth, and get its updated view on the increasing competitive original content market.
  • Hand in hand with that, are we seeing the pace of cord cutting pick up at Verizon (VZ) and Comcast (CMCSA)?
  • Is the new blonde espresso delivering for Starbucks (SBUX)? Is the company still focused on China? What’s next for its food offering as McDonald’s (MCD) and Dunking Donuts (DNKN) shake up their menus?
  • While we wait for President Trumps rebuilding US infrastructure framework, what inning are we in for post-hurricane rebuilding? That’s the question for Caterpillar (CAT) and United Rentals (URI).
  • Following all the newly announced connected gadgets at CES 2018, does Lam Research (LRCX) see an even bigger market for semi-cap equipment this year? Does Intel (INTC) see one for chips?

 

Thematic Signals

Each week we look for data points pertaining to our 17 investment themes, or as we call them Thematic Signals. These signals can be confirming or they can serve to raise questions as to whether a theme’s tailwinds are strengthening or ebbing. Be sure to check out the Thematic Signals section of our website to read more about these stories and others we publish throughout the week. Here are some of the highlights we saw this week:

 

Baby Boomer aging facts paint a growth picture
Aging of the Population

Another reminder there is no fighting Father Time and our Aging of the Population theme is fueled by an expanding market.

Read more here

 

Bankrate findings raise questions on consumer spending
Cash-Strapped Consumer

Normally, here at Tematica we love to get new data, but from time to time we get confirming data that puts a sour taste in our mouth. New findings from Bankrate offer support for our Cash-Strapped Consumer investing theme, and it ties with something we’ve been talking about on our Cocktail Investing podcast – rising consumer debt with a Fed that has been and is poised to continue increasing interest rates. Barring a pronounced move higher in wages, which we haven’t seen, that’s a recipe for more pressure on consumer spending – a key driver of the domestic economy. We continue to question if consumers will spend tax legislation related benefits or get their financial house in order.

Read more here.

 

Passing right over our crumbling bridges, roads and tunnels
Economic Acceleration/Deceleration

It’s no mystery that America’s infrastructure is in dire shape — in particular, the bridges, roads and tunnels in our cities largest cities. The American Society of Civil Engineers’ annual grade for our infrastructure currently stands at a D+, with an estimated cost of $3.9 trillion to bring it up to a B-level. That’s nearly 4 trillion — trillion with a “T” — just to make our daily commute good, not great.

Read more here.

Will Tax Cuts Translate into Consumer Spending & Business Investment?

Will Tax Cuts Translate into Consumer Spending & Business Investment?

 

Following the first full week of trading in 2018, the S&P 500 is up over 3% for the first nine days of trading in the new year. That index is edged out by the Nasdaq Composite Index, which saw a boost following the tech-heavy news flow last week spinning out of CES 2018. That annual event is a bevy of confirming data points for our Connected Society and Disruptive Technologies investing themes, and subscribers to the Tematica Investing newsletter saw several positions on the Select List move higher in response.

Even though we have this week yet another shortened trading week, we will still see a be pronounced pick up in 4Q 2017 earnings reports and more economic data that will factor into 4Q 2017 calculations. Also on hand will be a first glance at how the economy is performing in 2018. Now let’s get down to business…

 

On the Economic Front

Since entering 2018, we’ve witnessed a modest drop in the Atlanta Fed’s GDP Now forecast for 4Q 2017 to 2.8% from 3.2%, primarily due to weaker than expected December auto sales and employment reports.

 

 

These reports have led to a tapering off in the Citibank Economic Surprise Index (CESI), which had been on the rise and well into positive territory exiting 2017. For those unfamiliar with the CESI, it shows how economic data are progressing relative to the consensus forecasts of market economists. A positive reading of the Economic Surprise Index suggests that economic releases have on balance been beating consensus expectations.

On the economic data schedule this week are several additional key pieces of data that will factor into 4Q 2017 GDP, namely the December figures for Industrial Production and Housing Starts. Over the last few months, we’ve seen a pick up in both single family housing permits as well as single family housing starts. Given the geographic breakdown, some of this upswing in activity can be attributed to post-hurricane rebuilding, but another likely factor could be homebuilders looking to cash in on the continued rise in new home prices given the limited supply of homes for sale over the last several quarters.

Turning to the December Industrial Production report, excluding the impact of the post-hurricane rebound in oil and gas extraction in the Texas region, industrial production was flat in November. With November’s Capacity Utilization reading of 77.1%, we continue to question the willingness of businesses to invest in property, plant and equipment given the degree of excess manufacturing capacity. In assessing the December data, we’ll be looking to see if there is a meaningful increase in capacity utilization. If not, we’ll see it as building our case that 2018 GDP is not likely to receive as big a tax reform boost as some are calling for.

The week ahead also brings us the latest Fed Beige Book iteration, the summary of anecdotal reports and economic findings from the various regional Fed Banks. With the Fed’s next FOMC meeting set for March 20-21, investors and economists will be mining this report for indications as to when the Fed could next boost interest rates. Finally, we’ll get first indications on how the domestic economy is fairing during the first month of 2018 with the January Empire Manufacturing and Philly Fed indices.

 

 

On the Earnings Front

Because of the Martin Luther King holiday, domestic stock markets are closed on Jan. 15 leaving us with another compressed trading week. The difference this time around is that by the end of this week reporting season will have moved into the fast lane. More than 80 companies are reporting their quarterly results and will update their respective outlooks. Hopefully, they will also touch on the impact to be had on their bottom line from tax reform. By comparison, only 48 companies have gone through that exercise over the prior two weeks.

What we learn this week will set the stage for next week when more than 350 companies will go through their quarterly earnings routine. By the time we close the week of Jan. 26, we should have pretty firm indications of the impact of tax reform on 2018 earnings expectations and soon after a clearer picture of where strategists see the S&P 500 going in 2018. We’ve seen several analysts boost their respective earnings forecasts ahead of these reports as they have lifted their S&P 500 price targets in the range of 3,000 to 3,100. The more earnings reports we have under our collective belts, the better we can see the intended image or in this case potential upside to be had for the S&P 500, much like coloring in the lines in a coloring book.

We still have our reservations over the extent that tax cuts will translate into consumer spending and business investment, but odds are the coming adjustments will lead the market to melt up further in the coming weeks. Nothing else has slowed it down in recent times, so why should that change, right? #sarcasm

In terms of what we’ll be looking for in these reports in addition to tax reform puzzle pieces:

  • From rail companies CSX (CSX) and KC Southern (KSU), how was rail traffic in 4Q 2017 and what are its prospects for the current quarter? Are we poised to see a seasonal downtick after the holiday shopping season or will other parts of the economy buoy rail traffic?
  • Similarly, what is JB Hunt Transportation (JBHT) seeing in the way of truck tonnage?
  • From Fastenal (FAST) and Alcoa (AA), what is it seeing for the economy in terms of bright spots and weaks spots as we put 2017 further in the rear view mirror?
  • Coming out of the Connected Society mecca that was CES 2018, does Taiwan Semiconductor (TSM) all of the announcements and product introduction translating into greater than expected chip demand for this year? Also, what are it’s capital spending plans for new semi-cap equipment and what does that mean for shares of Applied Materials (AMAT) and other semi-cap equipment companies?
  • Are we seeing a tipping point for our Cashless Consumption investment theme here in the U.S.? Commentary from American Express (AXP) and Synchrony Financial should shed some light on that answer.
  • With Bank of America (BAC), Citigroup (C), and US Bancorp (USB), what’s the outlook for loan demand vs. charge-offs? Are they seeing greater demand for capital compared to three or six months ago?

 

 

 

Thematic Signals

Each week we look for data points pertaining to our 17 investment themes, or as we call them Thematic Signals. These signals can be confirming or they can serve to raise questions as to whether a theme’s tailwinds are strengthening or ebbing. Be sure to check out the Thematic Signals section of our website to read more about these stories and others we publish throughout the week. Here are some of the highlights we saw this week:

 

Rising consumer credit card debt to be a headwind to GDP in 2018
Cash-Strapped Consumer

We are starting to get not only holiday sales results from the likes of Kohl’s (KSS) and others, but also December same-store-sales results from Tematica Investing Select List resident Costco Wholesale (COST) and its retail brethren. Thus far the results are positive and in some cases much better than expected, but when we see we think about the other shoe to drop. In this case, that is “How are consumers paying for all of this given that wages barely budged in 2017?” The answer is they have been turning to their credit cards… Read more here

 

Having Siri and Alexa join you in the shower
Affordable Luxury, Connected Society

It used to be there were a handful of places on could retreat to find some downtime, but it looks like we are on the verge of losing one as Moen is bringing the connected home and virtual assistant connectivity into the shower. Based on the price points, this functionality will mesh with our Affordable Luxury investing theme, but much like we’ve seen with cars the technology will trickle down to lower-tier offerings over time. How long until we can voice dictate messages? Better yet, how long until we can change the music?

Read more here

 

Once again Amazon expands its Dash program, removing shopping friction along the way
Connected Society

It used to be that if you ran out of laundry detergent, the dirty clothes would pile up. Those days may soon be over as Amazon (AMZN) is rolling out virtual Dash buttons to third-party screens, like those now found on washing machines, dryers, dishwashers and other appliances. This further extends Amazon’s reach into the home as it removes the pain point that is running out of detergent, laundry soap, dryer sheets and others consumables used in and around the home. Pretty sneaky…sneaky like a fox because Dash buttons are only available to Prime members.

Read more here

 

Is Diet Coke diluting and deluding itself with its latest move?
Food with Integrity, Guilty Pleasure, Fattening of the Population

Given falling sales of soda, both the regular “sugary” kind as well as diet, Coca-Cola is once again trying to entice consumers with a new round of Diet Coke-branded beverages that will be available in the coming weeks. We’ve not tried them, and while we’re somewhat skeptical our preference for first-hand research means giving them a go.

Our concern is the potential risk to the Diet Coke-brand, which to date has focused on cola beverages. And while we understand the argument to be had with brand extension and consumer choice, we’ve also seen too much choice dilute a brand resulting in a company that needs to bring a brand “back to its core.”

At the same time, creating a new brand is no easy task. To us, it says Coca-Cola could have a tough time ahead as it tries to keep consumers coming back for its products as they look for healthier alternatives.

Read more here