HI Market View Commentary 11-28-2022
What have we done over Thanksgiving?
- Added more SPY puts at a higher strike to make more on the way down
- Trying to feel our way around the market
- Having more protection while we weigh good news with the bad economic climate.
We have to keep in mind as we weigh decisions on protecting our stocks that we are IN a recession.
- For the last year
- 2 consecutive negative GDP Quarters
- Fed will raise rates again, but the market will react based on what they comment on for the future rate hikes
- AND if we get a 50BPS hike instead of a 75BPS, we’ll enjoy a nice Christmas rally.
- Big companies laying thousands of employees off
- Best ever Black Friday numbers, BUT partly because everything is more expensive
- People are buying Christmas gifts on pay over time deals and buying on credit. i.e. People are spending money they don’t have.
Where is the place to be for a recession?
- Recession proof stocks!
Recession proof stocks:
- Command pricing
- Cash on hand
- History of weathering past storms
- DIS – 60% profit on movies
- AAPL – LOADS of cash, Great margin,
- F – Great car sales, weathered financial crisis well
- BAC, JPM – making more on higher interest rates
- This DOESN’T mean that their stock prices won’t look awful, It means they will weather the storm well, and put us in a good position into the future.
Earnings dates:
COST 12/08 AMC
DG 12/01 est
MU 12/20 AMC
https://www.briefing.com/the-big-picture
The Big Picture
Last Updated: 18-Nov-22 15:40 ET | Archive
About that Walmart earnings report
Walmart (WMT) is the world’s largest retailer. It is also a Dow component and member of the S&P 500 consumer staples sector thanks to its status as the largest grocer in the U.S.
On November 15, Walmart reported its fiscal third quarter results and they were good results. The company easily topped the consensus EPS estimate, aided by an 8.8% year-over-year increase in revenues of $152.8 billion and an 8.2% increase in comparable sales for its Walmart U.S. division, excluding fuel. Its adjusted operating expenses as a percentage of net sales decreased by 75 basis points and helped drive a 3.9% increase in adjusted operating income.
But we’re not here to talk about Walmart’s earnings. We’re here to talk about what Walmart said about its third quarter performance, because what it said ultimately said a lot about the U.S. economy.
Points of Emphasis
CEO Doug McMillon got right to [our] point on the earnings conference call. The first thing he chose to highlight was the following:
“We delivered strong results on the top line across our segments, and our value proposition is resonating with customers and members around the world. We see this in our grocery business in stores and online in key markets like the U.S. and Mexico. Customers that came to us less frequently in the past are now shopping with us more often, including higher-income customers (emphasis our own).
CFO John David Rainey noted later on the call that “High fuel prices and mid-teens food inflation have forced customers to manage household budgets more tightly, making frequent trade-offs and biasing spending toward everyday essentials (emphasis our own).”
He later added that “…we’ve continued to gain grocery market share from households across income demographics, with nearly three-quarters of the share gain coming from those exceeding $100,000 in annual income. This quarter, our private brand penetration in food categories increased about 130 basis points, reflecting customer’s increased focus on quality products at value prices. We observed incremental trade-down in categories including proteins, baking goods, baby, and dog food.”
Mr. Rainey detailed that food sales continues to lead the Walmart U.S. division with mid-teens growth, but that general merchandise sales declined low-single digits with softness in electronics, home, and apparel (emphasis our own).
The company’s earnings presentation pointed out that the 8.2% comparable sales growth in U.S. was led by a 2.1% increase in transactions and a 6.0% increase in average ticket (i.e., inflation), driven by strength in food categories and private brand sales.
For Walmart International, the double-digit net sales growth for the Walmex division was paced by continued strength in food and consumables. Strong growth in Sam’s Club and eCommerce led a 6.9% increase in net sales for China, and for Canada, which registered a 5.5% increase in net sales growth, it was said that sales in food and consumables outpaced general merchandise.
Finally, Sam’s Club achieved 10.0% comparable sales growth, led by comparable sales gains in every category except technology, office and entertainment, which saw a mid-single digit decline on softness in consumer electronics.
Impressions
What are some of the key takeaways from what was heard from Walmart?
- Consumers are feeling the effects of persistently high inflation, including higher-income consumers, so they are seeking lower-cost providers.
- Consumers are starting to spend more now on what they need as opposed to what they want.
- Consumers are increasingly price conscious and, consequently, are trading down to private brands.
- Consumers see the cost benefits of buying in bulk, which is contributing to the ongoing strength at Sam’s Club (and Costco for that matter).
- Inflation is a global problem, and with the current high rates of inflation, it is not just an issue for low-income consumers.
What are some likely outcomes in coming months/quarters as we read between the lines of the report?
- Growth will slow as consumers rein in their discretionary spending.
- Inflation should ebb as end demand weakens at the same time supply chains improve.
- Companies are going to start losing pricing power as more consumers, out of necessity, refrain from paying full prices.
- Corporate profit margins should be under pressure, absent more aggressive cost-cutting actions.
- Branded products should see market share erosion as consumers shift purchases more to private label/generic products.
- Concerns about job security should lead to more prudent spending behavior.
A Hammer and a Nail
The main takeaway is that the economic environment is deteriorating in large part because of the strain that high inflation is putting on household budgets, particularly for things that are needed the most — like food and energy — but also now because of the lag effect, and psychological effect, of the Fed’s rate hikes.
Some things are slowing naturally, yet it is the fear, too, that things will slow much more as the cumulative effects of the rate hikes make their way through the economy.
The Fed is working feverishly to get inflation under control. Its main policy tool has been to hike the target range for the fed funds rate. It is using that tool like a hammer, too.
Fittingly, Fed officials keep hammering home the point that the fed funds rate is not yet at a sufficiently restrictive level, that more rate hikes are necessary, and that the terminal rate (whatever that ends up being) is apt to remain in place for a while once it is reached.
The concern for the market is that the Fed is going to nail the economy to the ground with its rapid rate hikes and possibly six feet under. That concern has manifested itself in the Treasury market where there are deep inversions along the yield curve.
The 3mo-10yr spread, which some regard as the best recession harbinger, is inverted by 43 basis points and the 2yr-10yr spread is inverted by 67 basis points.
What It All Means
To be fair, there were some pleasing reports from other retailers, like Home Depot (HD), Lowe’s (LOW), and Foot Locker (FL), as well as a stronger-than-expected October Retail Sales Report, which pointed to some ongoing vibrancy in the U.S. consumer.
Things are by no means at a dire level yet. In fact, the Atlanta Fed GDP Now model estimate for Q4 real GDP was raised (emphasis our own) to 4.4% from 4.1% following the Retail Sales Report. It currently sits at 4.2%.
That is a long way from a contraction in growth, but the message from the Walmart report is that changes in consumer spending behavior are happening on the margin and are starting to move inward; hence, the migration of more higher-income households to Walmart’s shopping aisles.
That migration is destined to persist as the Fed keeps raising rates, as more companies announce layoffs, as the housing market continues to cool, as debtors face higher repayment burdens on variable rate debt, and as consumers continue to draw down excess savings.
As an aside, the personal savings rate as a percentage of disposable personal income is 3.1% versus 33.8% at its pandemic peak. Other than the 3.0% rate seen in June, that is the lowest it has been since the financial crisis.
That’s not a good starting point with the Fed desiring some weakening in the labor market to tame wage-based inflation pressures. It leaves many consumers in a precarious position should they lose their job. On that note, CNBC highlighted a LendingClub report that indicated 60% of Americans were living paycheck to paycheck as of October, up from 56% a year ago.
This understanding could ultimately work more in Walmart’s favor, but what’s good in coming months for Walmart — the world’s largest retailer and the U.S.’s largest grocer — won’t necessarily be associated with an economy that is in good shape.
Right now, the shape of the yield curve and the low level of personal savings suggests Walmart should have more business coming its way.
—Patrick J. O’Hare, Briefing.com
(Editor’s Note: the next installment of The Big Picture will be published the week of November 28)
Where will our markets end this week?
Negative
DJIA – Bearish
SPX – Bearish
COMP – Bearish
Where Will the SPX end November 2022?
11-28-2022 0%
11-14-2022 6%?
11-07-2022
10-31-2022 4.0%
Earnings:
Mon:
Tues: HPE
Wed: WOOF, CRM
Thur: BIG, DG, KR, ULTA
Fri:
Econ Reports:
Mon:
Tue Consumer Confidence
Wed: ADP Employment, GDP
Thur: Initial, Continuing claims
Fri: Nonfarm Payrolls, Unemployment
How am I looking to trade?
Keeping an eye on Economic news and seeing how the market reacts. Enjoying protection on.
www.myhurleyinvestment.com = Blogsite
info@hurleyinvestments.com = Email
Questions???
Disney Chief Executive Officer Bob Iger said Monday during his first town hall since returning to the company that he won’t remove its hiring freeze as he reassesses its cost structure.
Iger kicked off the town hall by quoting a song from the musical “Hamilton” that says “There is no more status quo. But the sun comes up and the world still spins,” according to sources who heard the town hall and asked to remain anonymous because the event was private.
It was Iger’s first town hall with staff since Disney abruptly announced last week that he would replace Bob Chapek, who had been in the job for less than three years. Under Chapek, Disney faced criticism for its treatment of employees, its response to Florida’s controversial “Don’t Say Gay” legislation and its decision to take away budgetary power from creative heads.
In a memo earlier this month, Chapek had announced plans for a hiring freeze, layoffs and cost cuts. Disney shares have fallen nearly 38% this year.
“It felt like it was a wise thing to do in terms of the challenges, and at the moment, I don’t have any plans to change it,” Iger said Monday of the hiring freeze.
Iger, 71, had repeatedly said he wouldn’t return as Disney’s CEO, but on Monday told staffers it was “an easy yes” to return to the job. He said it was the right thing for him to do because of his love for Disney and its employees. Several senior executives recently told board members they’d lost confidence in Chapek’s leadership, CNBC reported last week, prompting the company’s outreach to Iger, who previously served as Disney’s CEO for 15 years.
Iger’s Q&A
After about five minutes of introduction, Iger jumped into taking questions, including many from an in-person audience. Disney employees could submit both named and anonymous questions before the event began. Many in attendance began their questions by thanking Iger for returning the company.
Iger acknowledged Disney’s focus must shift toward making its streaming business profitable rather than concentrating on simply adding subscribers, which was the company’s priority when he gave up the CEO job in 2020. He noted Disney won’t be pursuing any major acquisitions in the near future, adding he’s comfortable with Disney’s current set of assets.
In a memo last week, Iger said one of his first actions will be to redo Disney’s organizational structure, which under Chapek centralized decision-making over content and distribution was centralized under Kareem Daniel. Iger has already fired Daniel and said at the town hall a new structure will take time to put in place. He said that will be done in conjunction with other executives including chairman of general entertainment content Dana Walden, Disney Studios head Alan Bergman, ESPN president Jimmy Pitaro, and CFO Christine McCarthy.
Iger said he wouldn’t make any dramatic proclamations about Disney’s work-from-home policies but said he felt creative businesses worked best when employees were together in-person.
Iger joked his wife, Willow Bay, told him he should run Disney again so that he wouldn’t run for U.S. president — something Iger has thought about in the past.
Toward the end of his remarks, Iger noted that he wouldn’t have come back if he didn’t believe Disney’s future is bright.
It seems like an eternity ago, but it’s just been a year.
At this time in 2021, the Nasdaq Composite had just peaked, doubling since the early days of the pandemic. Rivian’s blockbuster IPO was the latest in a record year for new issues. Hiring was booming and tech employees were frolicking in the high value of their stock options.
Twelve months later, the landscape is markedly different.
Not one of the 15 most valuable U.S. tech companies has generated positive returns in 2021. Microsoft has shed roughly $700 billion in market cap. Meta’s market cap has contracted by over 70% from its highs, wiping out over $600 billion in value this year.
In total, investors have lost roughly $7.4 trillion, based on the 12-month drop in the Nasdaq.
Interest rate hikes have choked off access to easy capital, and soaring inflation has made all those companies promising future profit a lot less valuable today. Cloud stocks have cratered alongside crypto.
There’s plenty of pain to go around. Companies across the industry are cutting costs, freezing new hires, and laying off staff. Employees who joined those hyped pre-IPO companies and took much of their compensation in the form of stock options are now deep underwater and can only hope for a future rebound.
IPOs this year slowed to a trickle after banner years in 2020 and 2021, when companies pushed through the pandemic and took advantage of an emerging world of remote work and play and an economy flush with government-backed funds. Private market darlings that raised billions in public offerings, swelling the coffers of investment banks and venture firms, saw their valuations marked down. And then down some more.
Rivian has fallen more than 80% from its peak after reaching a stratospheric market cap of over $150 billion. The Renaissance IPO ETF, a basket of newly listed U.S. companies, is down 57% over the past year.
Tech executives by the handful have come forward to admit that they were wrong.
The Covid-19 bump didn’t, in fact, change forever how we work, play, shop and learn. Hiring and investing as if we’d forever be convening happy hours on video, working out in our living room and avoiding airplanes, malls and indoor dining was — as it turns out — a bad bet.
Nasdaq 100 versus S&P 500
One year, Nov. 22, 2021 – Nov. 22, 2022
Add it up and, for the first time in nearly two decades, the Nasdaq is on the cusp of losing to the S&P 500 in consecutive years. The last time it happened the tech-heavy Nasdaq was at the tail end of an extended stretch of underperformance that began with the bursting of the dot-com bubble. Between 2000 and 2006, the Nasdaq only beat the S&P 500 once.
Is technology headed for the same reality check today? It would be foolish to count out Silicon Valley or the many attempted replicas that have popped up across the globe in recent years. But are there reasons to question the magnitude of the industry’s misfire?
Perhaps that depends on how much you trust Mark Zuckerberg.
Meta’s no good, very bad, year
It was supposed to be the year of Meta. Prior to changing its name in late 2021, Facebook had consistently delivered investors sterling returns, beating estimates and growing profitably with historic speed.
The company had already successfully pivoted once, establishing a dominant presence on mobile platforms and refocusing the user experience away from the desktop. Even against the backdrop of a reopening world and damaging whistleblower allegations about user privacy, the stock gained over 20% last year.
But Zuckerberg doesn’t see the future the way his investors do. His commitment to spend billions of dollars a year on the metaverse has perplexed Wall Street, which just wants the company to get its footing back with online ads.
Meta Reality Labs VP: Company’s building a brand new computing platform and it’s not cheap
The big and immediate problem is Apple, which updated its privacy policy in iOS in a way that makes it harder for Facebook and others to target users with ads.
With its stock down by two-thirds and the company on the verge of a third straight quarter of declining revenue, Meta said earlier this month it’s laying off13% of its workforce, or 11,000 employees, its first large-scale reduction ever.
“I got this wrong, and I take responsibility for that,” Zuckerberg said.
Meta’s metaverse missteps
Performance since Reality Labs (RL) line-item breakdown
Mammoth spending on staff is nothing new for Silicon Valley, and Zuckerberg was in good company on that front.
Software engineers had long been able to count on outsized compensation packages from major players, led by Google. In the war for talent and the free flow of capital, tech pay reached new heights.
Recruiters at Amazon could throw more than $700,000 at a qualified engineer or project manager. At gaming company Roblox, a top-level engineer could make $1.2 million, according to Levels.fyi. Productivity software firm Asana, which held its stock market debut in 2020, has never turned a profit but offered engineers starting salaries of up to $198,000, according to H1-B visa data.
Fast forward to the last quarter of 2022, and those halcyon days are a distant memory.
Layoffs at Cisco, Meta, Amazon and Twitter have totaled nearly 29,000 workers, according to data collected by the website Layoffs.fyi. Across the tech industry, the cuts add up to over 130,000 workers. HP announcedthis week it’s eliminating 4,000 to 6,000 jobs over the next three years.
For many investors, it was just a matter of time.
“It is a poorly kept secret in Silicon Valley that companies ranging from Google to Meta to Twitter to Uber could achieve similar levels of revenue with far fewer people,” Brad Gerstner, a tech investor at Altimeter Capital, wrote last month.
Gerstner’s letter was specifically targeted at Zuckerberg, urging him to slash spending, but he was perfectly willing to apply the criticism more broadly.
“I would take it a step further and argue that these incredible companies would run even better and more efficiently without the layers and lethargy that comes with this extreme rate of employee expansion,” Gerstner wrote.
Microsoft’s president responds to big tech layoffs
Activist investor TCI Fund Management echoed that sentiment in a letter to Google CEO Sundar Pichai, whose company just recorded its slowest growth rate for any quarter since 2013, other than one period during the pandemic.
“Our conversations with former executives suggest that the business could be operated more effectively with significantly fewer employees,” the letter read. As CNBC reported this week, Google employees are growing worried that layoffs could be coming.
SPAC frenzy
Remember SPACs?
Those special purpose acquisition companies, or blank-check entities, created so they could go find tech startups to buy and turn public were a phenomenon of 2020 and 2021. Investment banks were eager to underwrite them, and investors jumped in with new pools of capital.
Mega-cap moves
Alphabet & Meta performance since market high
SPACs allowed companies that didn’t quite have the profile to satisfy traditional IPO investors to backdoor their way onto the public market. In the U.S. last year, 619 SPACs went public, compared with 496 traditional IPOs.
This year, that market has been a bloodbath.
The CNBC Post SPAC Index, which tracks the performance of SPAC stocks after debut, is down over 70% since inception and by about two-thirds in the past year. Many SPACs never found a target and gave the money back to investors. Chamath Palihapitiya, once dubbed the SPAC king, shut down two deals last month after failing to find suitable merger targets and returned $1.6 billion to investors.
Then there’s the startup world, which for over a half-decade was known for minting unicorns.
Last year, investors plowed $325 billion into venture-backed companies, according to EY’s venture capital team, peaking in the fourth quarter of 2021. The easy money is long gone. Now companies are much more defensive than offensive in their financings, raising capital because they need it and often not on favorable terms.
Venture capitalists are cashing in on clean tech, says VC Vinod Khosla
“You just don’t know what it’s going to be like going forward,” EY venture capital leader Jeff Grabow told CNBC. “VCs are rationalizing their portfolio and supporting those that still clear the hurdle.”
The word profit gets thrown around a lot more these days than in recent years. That’s because companies can’t count on venture investors to subsidize their growth and public markets are no longer paying up for high-growth, high-burn names. The forward revenue multiple for top cloud companies is now just over 10, down from a peak of 40, 50 or even higher for some companies at the height in 2021.
The trickle down has made it impossible for many companies to go public without a massive markdown to their private valuation. A slowing IPO market informs how earlier-stage investors behave, said David Golden, managing partner at Revolution Ventures in San Francisco.
“When the IPO market becomes more constricted, that circumscribes one’s ability to find liquidity through the public market,” said Golden, who previously ran telecom, media and tech banking at JPMorgan. “Most early-stage investors aren’t counting on an IPO exit. The odds against it are so high, particularly compared against an M&A exit.”
IPO underperformance
The 2020 and 2021 vintage has underperformed the broader market.
There have been just 173 IPOs in the U.S. this year, compared with 961 at the same point in 2021. In the VC world, there haven’t been any deals of note.
“We’re reverting to the mean,” Golden said.
An average year might see 100 to 200 U.S. IPOs, according to FactSet research. Data compiled by Jay Ritter, an IPO expert and finance professor at the University of Florida, shows there were 123 tech IPOs last year, compared with an average of 38 a year between 2010 and 2020.
Buy now, pay never
There’s no better example of the intersection between venture capital and consumer spending than the industry known as buy now, pay later.
Companies such as Affirm, Afterpay (acquired by Block, formerly Square) and Sweden’s Klarna took advantage of low interest rates and pandemic-fueled discretionary incomes to put high-end purchases, such as Peloton exercise bikes, within reach of nearly every consumer.
Affirm went public in January 2021 and peaked at over $168 some 10 months later. Affirm grew rapidly in the early days of the Covid-19 pandemic, as brands and retailers raced to make it easier for consumers to buy online.
Buy now, pay later
Affirm’s share price has tanked since its public debut
By November of last year, buy now, pay later was everywhere, from Amazon to Urban Outfitters’ Anthropologie. Customers had excess savings in the trillions. Default rates remained low — Affirm was recording a net charge-off rate of around 5%.
Affirm has fallen 92% from its high. Charge-offs peaked over the summer at nearly 12%. Inflation paired with higher interest rates muted formerly buoyant consumers. Klarna, which is privately held, saw its valuation slashed by 85% in a July financing round, from $45.6 billion to $6.7 billion.
The road ahead
That’s all before we get to Elon Musk.
The world’s richest person — even after an almost 50% slide in the value of Tesla — is now the owner of Twitter following an on-again, off-again, on-again drama that lasted six months and was about to land in court.
Musk swiftly fired half of Twitter’s workforce and then welcomed former President Donald Trump back onto the platform after running an informal poll. Many advertisers have fled.
And corporate governance is back on the docket after this month’s sudden collapse of cryptocurrency exchange FTX, which managed to grow to a $32 billion valuation with no board of directors or finance chief. Top-shelf firms such as Sequoia, BlackRock and Tiger Global saw their investments wiped out overnight.
“We are in the business of taking risk,” Sequoia wrote in a letter to limited partners, informing them that the firm was marking its FTX investment of over $210 million down to zero. “Some investments will surprise to the upside, and some will surprise to the downside.”
Even with the crypto meltdown, mounting layoffs and the overall market turmoil, it’s not all doom and gloom a year after the market peak.
Golden points to optimism out of Washington, D.C., where President Joe Biden’s Inflation Reduction Act and the Chips and Science Act will lead to investments in key areas in tech in the coming year.
Funds from those bills start flowing in January. Intel, Micron and Taiwan Semiconductor Manufacturing Company have already announced expansions in the U.S. Additionally, Golden anticipates growth in health care, clean water and energy, and broadband in 2023.
“All of us are a little optimistic about that,” Golden said, “despite the macro headwinds.”
HI Financial Services Mid-Week 06-24-2014