Tuesday, February 20, 2018

Markets drop as Walmart earnings disappoint

Dow sank 178, decliners over advancers 3-2 & NAZ went up 10.  The MLP index added 2+ to the 272s.  Junk bond funds declined & Treasuries drifted lower.taking the yield on the 10 year Treasury up to 2.9%.  Oil was little changed in the 61s & gold lost 14 to 1341.

AMJ (Alerian MLP Index tracking fund)

CL=FCrude Oil61.66

GC=FGold 1,343.30

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Treasuries fell, with investors driving the benchmark yield higher ahead of a deluge of bond auctions this week.  The $ rose while US stocks fell for the first time in 7 days.  The Treasury will start a week of auctions totaling $258B with $151B of short-term bills & $28B of 2-year notes.  The 10-year rate rose to 2.9%.  The S&P 500 Index fell amid earnings & the greenback gained versus major peers.  While speculators are turning bearish, money managers are looking at the highest US yields in years as a buying opportunity in a world where shorter-term Japanese & German notes still carry negative yields.  Investors will also get to parse minutes this week from the most recent meetings of both the Federal Reserve & the ECB.  The US stock market only had a taste of the potential damage from higher bond yields, with the biggest test yet to come.  In Europe, the Stoxx 600 index edged higher after a pullback in equities emerged in Asia following several days of increases.  Benchmarks in Japan & South Korea slid more than 1% .  The ¥ weakened.  WTI oil tclimbed above $62 a barrel for the first time in more than a week. .

Dollar Rises With Treasury Yields; Stocks Struggle

Walmart (WMT), a Dow stock & Dividend Aristocrat, fell the most in more than 2 years after delivering a disappointing annual profit forecast, sparking fears that its bid to catch up with online business is losing momentum.  The company expects EPS of $4.75-5.00 this fiscal year, excluding some items, compared with the estimate of $5.13.  Though sales last qtr topped projections, the results reflected a slowdown in online orders, a key metric in its battle to fend off online competitors.  “We were a bit lower than plan” in e-commerce, CFO Brett Biggs said.  “We had a few operational issues from an inventory replenishment perspective,” he said, declining to provide specifics.  CEO Doug McMillon is trying to convert the company's brick-&-mortar shoppers into online customers, who spend almost twice as much overall & seek out higher-priced items.  At its e-commerce unit, sales rose 23% last qtr, less than ½ the pace of previous periods.  The company had been getting a tailwind from its acquisition of Jet.com, an online upstart that it bought in 2016.  Still, the company maintained its full-year forecast for online sales growth of about 40%. McMillon is also trying to keep employees happy by raising wages & enhancing parental-leave policies, while at the same time closing stores & cutting headcount at its headquarters.  Those investments, together with lowering prices, are taking a toll on profit.  Gross profit margins in the US contracted by 50 basis points in the qtr, said Biggs, who added that he doesn't see that level of decline continuing.  Adjusted EPS amounted to $1.33 in Q4, short of analysts’ projection of $1.37 & was partly due to pulling forward some investments to take advantage of a greater tax deduction, the company said.  One bright spot was same-store sales, which grew 2.6%, compared with the 2% projection tracked by Consensus Metrix.  The increase was fueled by sales of food, apparel & toys such as Lego & Hatchimals, Biggs said.  The company also cut its full-year net sales growth forecast by as much as ½ to 1.5-2%, due to its decision to halt tobacco sales in some Sam's Club warehouse locations & shutter part of its Brazilian e-commerce business.  The company also closed 63 Sam's Club units last month.  WMT is still assessing the impact of last year's federal tax changes, legislation that’s expected to bring huge benefits to retailers.  For now, the company is recording a provisional benefit of $207M for Q4 & full year.  It sees an effective tax rate of 24-26%, which is “a little higher than some expected,” Biggs said.  The expects a cash benefit of about $2B for the year as a result of the tax overhaul.  The stock tumbled 10+ to the 94s.
If you would like to learn more about WMT, click on this link:

Walmart Tumbles After Slowing Online Growth Jolts Investors

The housing market could plunge into recession if the Federal Reserve offsets the benefits of tax cuts by raising interest rates above 6% by the end of 2019, according to the National Association of Homebuilders.  “If we get interest rates north of 6% sometime between now and at the end of next year and we don’t see some correction in the labor markets, in the regulatory burden, then I think you could see the potential for a housing recession, but it would be caused by a lack of supply,” Jerry Howard, the group's CEO, said.  Recent market volatility has left investors concerned over whether the Fed will raise the benchmark federal funds rate more than expected, which could lead to another major sell-off.  Howard cited 3 factors that are affecting the markets & what would sway the Fed to increase rates: a labor shortage, the cost of building materials and construction regulations imposed over the past 7 years.  “Those three factors are really impacting markets more than anything else right now,” he said. The economy is growing, and I think that’s what’s forcing interest rates up.”  In 2017, the Fed raised interest rates by 0.75 percentage point & the target range for the federal funds rate is now 1.25-1.50%.  Under the new Fed chair, Jerome Powell, the market projects that the central bank is expected to raise rates 3 or 4 times this year.  “We expect there will be another maybe five fed rate hikes over the course of this year and next year,” Howard said.  “We expect that it will end up still south of 6%, maybe about 5 1/2%, and we think that the market can take that.”

Fed seen triggering housing slump by offsetting Trump tax cut

Stocks are having a rough day after WMT reported earnings.  More retail earnings will be coming this week & they could be choppy.  Of course, the stock market was overbought & profit taking had to be expected.  The Dow is still 1600 below its record highs reached on Jan 26 & will have a lot of damage to repair if the bulls want expect it to climb to new record levels.  The Treasury will be selling a lot of debt this week, a major test for the bond market.

Dow Jones Industrials

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