All Eyes On The September Jobs Report

All Eyes On The September Jobs Report

Today’s Big Picture

US market futures point to a modestly lower open Friday morning. After the disappointing manufacturing and services data this week, all eyes will be on today’s Nonfarm Payrolls report, which is expected to see 145,000 jobs added in September, up from 130,000 in August with the unemployment rate holding at 3.7% and wages gaining +0.2%. Keep in mind that the General Motors (GM) strike will add some confusion to the data as striking workers aren’t counted in payrolls.

We’ll also be looking for any updates on the previous downward revisions to payrolls. In August the BLS cut job gain estimates for 2018 and early 2019 by about 500,000, the largest such downward revision in the past decade. Overall we’ve seen downward revisions for around 17 months – a sure sign that labor market dynamics ...

Continue reading here

Adding a holiday shopping play for the season

Adding a holiday shopping play for the season

Key points in this issue

As expected, the last few days in the market have been a proverbial see-saw, which culminated in the sharp market rally following the mid-term elections. The outcome, which saw the Democrats gain ground in Washington, was largely expected. We’ll see in the coming weeks and months the degree of gridlock to be had in Washington and what it means for the economy, but we have to remember several other concerning items remain ahead of us. To jog your memory, these include the next round of budget talks between Itlay and EU, which should occur next week; continued rate hikes by the Fed as it looks to stave off inflation and get more tools back for the next eventual recession; and upcoming trade talks between the US-China.

This means that caution remains warranted as we navigate the next few weeks. We are, however, also moving deeper into the 2018 holiday shopping season and on this week’s Cocktail Investing podcast we talk with the National Retail Federation (NRF) on its 2018 Holiday Shopping Consumer Survey. As we put the final touches on that podcast, I don’t want to spoil it for you, but the NRF sees consumers opening their wallets at a brisker pace this year, with more shopping being done online (desktop and mobile) than ever before. Adding more credence and conviction to that conversation, Adobe (ADBE) recently published its 2018 U.S. online holiday sales forecast that calls for a 15% year over year increase.  Unsurprisingly that report names Amazon as a key beneficiary.

Yet Amazon shares have been hard hit in recent weeks following what has been called “disappointing” December quarter guidance. First, Amazon tends to guide to the conservative side, so that is to be expected. Second, on the company’s earnings conference call, it admitted its conservatism hiding behind the challenges in gauging its business in the second half the quarter.  With the metrics we are seeing for cloud adoption, the shift to digital commerce, online grocery ordering and the shift to better-for-you food, we view that outlook much the way Warren Buffett likely does — Amazon reset the bar for the December quarter so it could once again easily walk right over it.

That combination of what I see as opportunities has us adding the Amazon (AMZN) January 2019 1,800.00 (AMZN190118C01800000) calls that are currently trading near 92.00 to the Select List. This strike date allows us to capture both the holiday shopping season as well as the post-holiday return and spending. Given my comments above about the overall market, I’m setting a stop loss at 60.00, which will limit our downside.

Weekly Issue: Adding to BABA and DRFG

Weekly Issue: Adding to BABA and DRFG

 

Key points in this issue:

  • The market hits new records, but the corporate warnings are growing
  • We are using the recent fall-off in both Rise of the New Middle-Class investment theme company Alibaba (BABA) and Guilty Pleasure theme company Del Frisco’s (DRFG) to scale into both positions. Our price targets remain $230 and $14, respectively.
  • We’re putting some perspective around the National Retail Federation’s 2018 Holiday Shopping forecast that was published yesterday.
  • As more holiday shopping forecasts emerge, and we progress through the upcoming earnings season I plan on revisiting our current $2,250 price target for Amazon (AMZN) shares. More details on the pending acquisition of PillPack are also a catalyst for us, as well as Wall Street, to boost that target.
  • Heading into the holiday shopping season, our price target on UPS shares remains $130.
  • We continue to see Costco Wholesale (COST) a prime beneficiary of the Middle-class Squeeze. Our price target on the shares remains $250.
  • What to watch in tomorrow’s September Employment Report? Wage growth.

 

The market hits new records, but the corporate warnings are growing

While we’ve seen new records for the stock market indices this week, we’ve also seen the S&P 500 little changed amid fresh September data that in aggregate points to a solid US economy. This week we received some favorable September economic news in the form of the ADP Employment Report as well as the ISM Services Index with both crushing expectations. Despite these reports, the S&P 500 has barely budged this week, which suggests to me investors are expecting a sloppy September quarter earnings season. No doubt there will be some bright spots, but in aggregate we are seeing a number of headwinds compared to this time last year that could weigh on corporate outlooks.

Already we’ve had a number of companies issuing softer than expected outlooks due to rising input and transportation costs, trade and tariffs, political wrangling ahead of the upcoming mid-term elections, renewed concerns over Italy and the eurozone, and the slower speed of the economy compared to the June quarter. A great example of that was had yesterday when shares of lighting and building management company Acuity Brands (AYI) fell more than 13% after it reported fiscal fourth-quarter profit that beat expectations, but margins fell amid a sharp rise in input costs. The company said costs were “well higher” for items such as electronic components, freight, wages, and certain commodity-related items, such as steel, due to “several economic factors, including previously announced and enacted tariffs and wage inflation due to the tight labor market…”

Acuity is not the first company to report this and odds are it will not be the last one as September quarter earnings begin to heat up next week. As the velocity of reports picks up, we could be in for a bumpy ride as investors reset their growth and profit expectations for the December quarter and 2019.  The good news is we are our eyes are wide open and we will be prepared to use any meaningful moves lower to scale into our Thematic Leader positions or other positions on the Select List provided our investment thesis remains intact. Pretty much what we’re doing this morning with Alibaba (BABA) and Del Frisco’s Restaurant (DFRG) shares. As I watch the earnings maelstrom unfold, I’ll also be keeping an eye on inflation-related comments to determine if the Fed might be falling behind the interest rate hike curve.

 

Adding to our Alibaba and Del Frisco Restaurant Thematic Leader Positions

This morning we are putting some capital to work, scaling into and improving the respective cost basis for Alibaba (BABA) and Del Frisco’s Restaurant Group (DFRG), the Rise of the New Middle-Class and Guilty Pleasure Thematic Leader holdings.

Earlier this week, the administration inked a trade deal between the US-Mexico-Canada that has some incremental benefits, not yuuuuuuuge ones. But in the administration’s view, a win is a win and with that odds are the Trump administration will focus on making some progress with China trade talks. Per the recent Business Roundtable survey findings

As that happens we should see some of that overhang on BABA shares begin to fade, allowing the factors behind our original thesis to shine through. Before too long, we’ll be on the cusp of the upcoming Chinese New Year, the largest gift-giving holiday in the country, and as know from our own holiday shopping here in the US, consumer spending picks up ahead of the actual holiday.

We’re also seeing Wall Street turn more bullish on BABA shares – yesterday, they received a price target upgrade to $247 from $241 at Goldman Sachs that in its view reflects Alibaba’s expanding total addressable market with continued growth in its cloud business. We view this as more people coming around to our way of thinking on Alibaba’s business model, which closely resembles that of Amazon (AMZN) from several years ago. In short, the accelerating adoption of Alibaba’s digital platform along with the same for its cloud, streaming and mobile payment services should expand margins at the core shopping business and propel its other businesses into the black. Again, just like we’ve seen at Amazon and that has propelled the shares meaningfully higher.

Could we be early with BABA? Yes, but better to be early and patient than late is my thinking.

  • We will use the pullback in Alibaba (BABA) shares to improve our cost basis in this Rise of the New Middle-class position. Our price target on Alibaba shares remains $230.

 

Turning to Del Frisco’s, we have fresh signs that beef prices will trend lower over the next few years as beef production begins to climb. In the recently released Baseline Update for U.S. Agricultural Markets, projections through 2023, the Food and Agricultural Policy Institute (FAPRI) at the University of Missouri estimated the average price of a 600-to 650-pound feeder steer (basis Oklahoma City) at $158.51 per hundredweight (cwt) this year, and then declining to as low as $141.06 in 2020.

As a reminder, beef prices are the biggest impact on the company’s margin profile, and falling beef prices bode extremely well for better profits ahead. Even if we see a fickle consumer emerge, which is possible, but in my view has a low probability of happening given the increase in Consumer Confidence levels, especially for the expectation component, those falling beef prices should cushion the blow.

  • We are adding to our position in Guilty Pleasure company Del Frisco’s (DFRG), which at current levels will improve our cost basis. Our price target remains $14.

 

The NRF introduces its 2018 Holiday Shopping Forecast

Yesterday, the National Retail Federation published its 2018 holiday retail sales forecast, which covers the November and December time frame and excludes automobiles, gasoline, and restaurants sales. On that basis, the NRF expects an increase between 4.3%-$4.8% over 2017 for a total of $717.45- $720.89 billion. I’d note that while the NRF tried to put a sunny outlook on that forecast by saying it compares to “an average annual increase of 3.9% over the past five years” what it did not say is its 2018 forecast calls for slower growth compared to last year’s holiday shopping increase of 5.3%.

That could be some conservatism on their part or it could reflect their concerns over gas prices and other aspects of inflation as well as higher interest costs vs. a year ago that could sap consumer buying power this holiday season. Last October the NRF expected 2017 holiday sales to grow 3.6%-4.0% year over year, well short of the 5.3% gain that was recorded so it is possible they are once again underestimating the extent to which consumers will open their wallets this holiday season. And if you’re thinking about the chart on Consumer Confidence above and what I said in regard to our adding more DFRG shares, so am I.

While I am bullish, we can’t rule out there are consumer-facing headwinds on the rise, and that is likely to accelerate the shift to digital shopping this holiday season, especially as more retailers prime the digital sales pump. As Tematica’s Chief Macro Strategist, Lenore Hawkins, is fond of saying – Amazon is the deflationary Death Star, which to me supports the notion that consumers, especially those caught in our Middle-class Squeeze investing theme, will use digital shopping to offset any pinch they are feeling at the gas pump. It also means saving some dollars by not going to the mall – a double benefit if you ask me, and that’s before we even get to the time spent at the mall.

On its own Amazon would be a natural beneficiary of the seasonal pick up in shopping, but as I’ve shared before it has been not so quietly growing its private label businesses and staking out its place in the fashion and apparel industry. These moves as well as Amazon’s ability to competitively price product, plus the myriad way it makes money off its listed products and the companies behind them, mean we are entering into what should be a very profitable time of year for Amazon and its shareholders.

  • As more holiday shopping forecasts emerge, and we progress through the upcoming earnings season I plan on revisiting our current $2,250 price target for Amazon (AMZN) shares. More details on the pending acquisition of PillPack are also a catalyst for us, as well as Wall Street, to boost that target.

I’ve long said that United Parcel Service (UPS) shares are a natural beneficiary of the shift to digital shopping. With a seasonal pickup once again expected that has more companies offering digital shopping and more consumers shopping that way, odds are package volumes will once again outpace overall holiday shopping growth year over year. From a financial perspective, that means a disproportionate share of revenue and earnings are to be had at UPS, and from an investor’s perspective, that means multiple expansion is likely to be had.

  • As we head into the holiday shopping season, our price target on UPS shares remains $130.

 

Coming up – Costco earnings and the September Employment Report

After tonight’s market close, Middle-class Squeeze company Costco Wholesale (COST) will issue its latest quarterly results. Given the monthly reports that it issues, which has seen clear consumer wallet share gains in recent months and confirmed the brisk pace of new warehouse openings, we should see results tonight. As you are probably thinking, and correctly so, we are entering one of the strongest periods of the year for Costco, and that means watching not only its outlook, relative to the holiday shopping forecast we discussed above, but its membership comments and new warehouse location plans ahead of Black Friday. Two other factors to watch will be its comments on beef prices – the company is one of the largest sellers of beef in the world – and where it is seeing inflation forces at work.

In terms of consensus expectations for the quarter to be reported, Wall Street sees Costco serving up EPS of $2.36, up more than 13% year over year, on revenue of $44.27 billion, up 4.7% from the year ago quarter.

  • We continue to see Costco Wholesale (COST) a prime beneficiary of the Middle-class Squeeze. Our price target on the shares remains $250.

 

Tomorrow’s September Employment Report will cap the data filled week off. Following the blowout September ADP Employment Report, expectations for tomorrow’s report have inched up. While the number of jobs created is something to watch, the two key factors that I’ll be watching will be the payroll to population figure and wage data. The former will clue us into if we are seeing a greater portion of the US population working, while any meaningful movement in the latter will be fuel for inflation hawks. If the report’s figures for job creation and wage gains come in hotter than expected, we very well could see good news be viewed as concerning as investors connect the dots that call for potentially greater rate hike action by the Fed.

Let’s see what the report brings, and Lenore will no doubt touch on it as part of her next missive.

 

Weekly Issue: Adding Two Calls Ahead of the Holiday Season

Weekly Issue: Adding Two Calls Ahead of the Holiday Season

Key points in this issue

 

The NRF issues its 2018 holiday spend forecast,
and we add 2 new call positions

Yesterday, the National Retail Federation published its 2018 holiday retail sales forecast, which covers the November and December time frame and excludes automobiles, gasoline, and restaurants sales. On that basis, the NRF expects an increase between 4.3%-$4.8% over 2017 for a total of $717.45- $720.89 billion. I’d note that while the NRF tried to put a sunny outlook on that forecast by saying it compares to “an average annual increase of 3.9% over the past five years” what it did not say is its 2018 forecast calls for slower growth compared to last year’s holiday shopping increase of 5.3%.

That could be some conservatism on their part or it could reflect their concerns over gas prices and other aspects of inflation as well as higher interest costs vs. a year ago that could sap consumer buying power this holiday season. Last October the NRF expected 2017 holiday sales to grow 3.6%-4.0% year over year, well short of the 5.3% gain that was recorded so it is possible they are once again underestimating the extent to which consumers will open their wallets this holiday season. While I am bullish, we can’t rule out there are consumer-facing headwinds on the rise, and that is likely to accelerate the shift to digital shopping this holiday season, especially as more retailers prime the digital sales pump.

On its own Amazon would be a natural beneficiary of the seasonal pick up in shopping, but as I’ve shared before it has been not so quietly growing its private label businesses and staking out its place in the fashion and apparel industry. These moves as well as Amazon’s ability to competitively price product, plus the myriad way it makes money off its listed products and the companies behind them, mean we are entering into what should be a very profitable time of year for Amazon and its shareholders.

We already own the shares in Tematica Investing, but for some extra oomph here at Options+ I’m adding the Amazon (AMZN) Feb 2019 2000.00 (AMZN190215C02000000) calls that closed last night at 146.30. That strike price will capture the company’s December 2018 quarter earnings report as well as the post-holiday shopping that tends to happen each and every year.

As we move through the soon to be upon us September quarter earnings season, I’ll be assessing and collecting other retail outlooks for this holiday shopping season. Given the timing for this option position, I’m going to set a wider than usual stop loss at 100.00, and as the calls move higher, I’ll look to tighten it up.

 

I’ve long said that United Parcel Service (UPS) shares are a natural beneficiary of the shift to digital shopping. With a seasonal pickup once again expected that has more companies offering digital shopping and more consumers shopping that way, odds are package volumes will once again outpace overall holiday shopping growth year over year. From a financial perspective, that means a disproportionate share of revenue and earnings are to be had at UPS, and from an investor’s perspective, that means multiple expansion is likely to be had. Therefore, as we add those Amazon calls to our holdings, we will also do the same with UPS as follows:

 

As warnings flares are had, we’re sticking with our S&P 500 inverse calls

This week we received some favorable September economic news in the form of the ADP Employment Report as well as the ISM Services Index with both crushing expectations. Despite these reports, has barely budged this week, which suggests to me investors are expecting a sloppy September quarter earnings season for the market. No doubt there will be some bright spots, but in aggregate we are seeing a number of headwinds compared to this time last year that could weigh on corporate outlooks.

Already we’ve had a number of companies issuing softer than expected outlooks due to rising input costs, trade and tariffs, the slower speed of the economy compared to the June quarter, and concerns over higher gas prices and the impact on consumers. A great example of that was had yesterday when shares of lighting and building management company Acuity Brands (AYI) fell more than 13% after it reported fiscal fourth-quarter profit that beat expectations, but margins fell amid a sharp rise in input costs. The company said costs were “well higher” for items such as electronic components, freight, wages, and certain commodity-related items, such as steel, due to “several economic factors, including previously announced and enacted tariffs and wage inflation due to the tight labor market…”

Acuity is not the first company to report this and odds are it will not be the last one as September quarter earnings begins to heat up next week. As the velocity of reports picks up, we could be in for a bumpy ride as investors reset their growth and profit expectations for the December quarter and 2019. Therefore, we will continue to hold over inverse S&P 500 calls, which thus far are little changed from where we added them last week.

 

Checking in on our Universal Display calls

Over the last few weeks, we’ve seen a growing reception for Apple’s (AAPL) new iPhone models, both of which utilize the organic light emitting diode display technology that is made possible by Universal Display’s chemical and intellectual property business. We’ve also started to see adoption outside of Apple with other smartphone companies and in other markets as well (TVs, automotive lighting), which confirms to me adoption rates are on the upswing. This bodes very well for Universal’s business in the second half of 2018 and beyond as well as our January 2019 calls.

The next known catalyst for OLED shares and these calls is November 1, when Apple will report its September quarter results. I’ll be on the lookout for additional signs of OLED adoption between now and then, but for now let’s stick with our OLED calls.

 

 

Weekly Issue: The NRF holiday forecast is another boost for us

Weekly Issue: The NRF holiday forecast is another boost for us

KEY POINTS FROM THIS ALERT:

  • We continue to rate the United Parcel Service (UPS) Jan 2018 130.000 calls (UPS180119C00130000) a Buy up to $1.00, with a corresponding stop loss at 0.30. 
  • We continue to rate the Walmart (WMT) Jan 2018 80.000 calls (WMT180119C00080000) calls a Buy at current levels. We continue to have a stop loss set at 1.80, but as those calls move higher in the coming weeks we will look to boost that level accordingly.
  • We continue to rate the Corning (GLW) November 17, 2017 $31 calls (GLW171117C00031000) a Buy at current levels. Our protective stop loss for this position remains set at 0.25, and we’ll look to boost that level of protection in the coming days and weeks as the calls trade higher.

 

National Retail Federation (NRF) Holiday Forecast: Another Confirming Data Point for UPS Calls

Earlier this week we issued a special alert adding the United Parcel Service (UPS) Jan 2018 130.000 calls (UPS180119C00130000) to the Tematica Options+ Select List — click here to view the alert in case you missed it.  We made this move given the clear prognosis for digital shopping to take consumer wallet share once again in the 2017 holiday shopping season. As we argued, odds are digital shopping will take a hefty bite as well out of Halloween related sales as well. All of this reinforces our view that UPS is one of the unsung heroes when it comes to digital shopping, a key aspect of our Connected Society investing theme.

As you can imagine, even though the calls traded off during the last few days, we were grinning ear to ear when the mack-daddy of holiday forecasting — the National Retail Federation (NRF) — issued its own 2017 holiday shopping forecast. The NRF sees a 3.6% to 4% rise in holiday retail sales during the November-to-December. Leave it to the NRF to point out there are 32 shopping days between Thanksgiving and Christmas, one more than last year, and an extra weekend day for shopping since Christmas falls on a Monday.

Moving past the initial forecast we find that even the NRF acknowledges the ongoing shift away from brick & mortar retail given its view that non-store sales, better known as online and mobile, are expected to rise 11%-15% percent to about $140 billion vs. 12.6% in 2016. We see that as the latest shot in the arm for these recently added UPS calls, which we continue to rate a Buy at current levels.

 

Wal-Mart Expected to See its Fair Share of Holiday Says, Especially with Toys “R” Us’ Troubles. 

We also see these 2017 holiday shopping forecasts as a positive for the Walmart (WMT) Jan 2018 80.000 calls (WMT180119C00080000) calls we’ve previously recommended. Not only is Wal-Mart one of the largest retailers, it is expanding its online presence and is poised to gain incremental spending on toys this year along with Amazon (AMZN) owing to the bankruptcy of Toys “R” Us. Market research firm NPD Group recently said U.S. toy sales grew 3% in the first half of 2017 and said it expects holiday season sales to bring full-year growth to 4.5%, helped by the upcoming Star Wars movie.

We’ve seen this competitor closing, share gaining movie before when Best Buy (BBY) benefitted from the closer of Circuit City and then again with store closures by hhgregg (HGGGQ). The sequel was had with Dick’s Sporting Goods (DKS) given the closings of  Sports Authority, Sports Chalet and other sporting good and outdoor retailers in the last few years. Also helping Wal-Mart this year is its holiday season layaway program that caters to Cash-Strapped Consumers. As we’ve discussed at TematicaResearch.com, lackluster wage growth, credit card debt topping $1 trillion-plus new data from the U.S. Department of Education showing 42.3 million Americans owe a total of $1.33 trillion in federal student loans means there will be no shortage of Cash-Strapped Consumers this holiday shopping season.

  • We continue to rate the Walmart (WMT) Jan 2018 80.000 calls (WMT180119C00080000) calls a Buy at current levels.
  • We continue to have a stop loss set at 1.80, but as those calls move higher in the coming weeks we will look to boost that level accordingly.

Before we move on, a quick housekeeping note with regard to Wal-Mart – last week we were stopped out of the Wal-Mart (WMT) January 19, 2018, 82.50 calls (WMT180119C00082500) when they crossed the 1.50 stop loss.

 

Still Waiting for the Catalyst for Corning Calls to Kick In — the Launch of iPhone X

With regard to the Corning (GLW) November 17, 2017 $31 calls (GLW171117C00031000), they rallied back this week to finish slightly in the green. As a reminder, we continue to wait for the debut of Apple’s (AAPL) iPhone X in early November as it is likely keeping potential iPhone 8 and 8 plus owners in a holding pattern until it hits shelves and they can truly compare the models. The next known catalyst for these calls will be when Corning reports its 3Q 2017 earnings on October 24.

  • Ahead of both of these events, we continue to rate the Corning (GLW) November 17, 2017 $31 calls (GLW171117C00031000) a Buy at current levels.
  • Our protective stop loss for this position remains set at 0.25, and we’ll look to boost that level of protection in the coming days and weeks as the calls trade higher.

 

Trump and Clinton Weighing on Holiday Shopping Season?

Trump and Clinton Weighing on Holiday Shopping Season?

While the election may be eating up ad space usually used for holiday shopping, the National Retail Federation’s forecast for holiday spending now calls for a decline in holiday spending per consumer this year. Setting the table for what could be another lackluster holiday shopping season as the Cash-strapped Consumer pinches the purse strings?

According to the National Retail Federation‘s annual consumer spending survey, shoppers may have a more conservative holiday spending budget as a result of the upcoming election.

Consumers expect to spend an average of $935.58 during the holiday shopping season on a growing list of items, including gifts for others, self-spending, food, flowers, decorations and greeting cards for Christmas, Hanukkah and Kwanzaa.

Last year, the record total spending, on average, was $952.58.

“Everywhere you turn — whether you’re picking up a newspaper or watching television — political advertisements are taking up ad space that retailers typically use to get holiday shopping on the minds of consumers across the country,” NRF President and CEO Matthew Shay said in a statement.

“Once the election has passed, we anticipate consumers will pull themselves out of the election doldrums and into the holiday spirit.”

Source: Holiday Shopping To Surge Post-Election | PYMNTS.com