Market Commentary

Capital 19 Catch-Up – Feb 26

It was another good week for Wall St as the Dow and the Nasdaq rose for the ninth straight week. It’s the Nasdaq’s best weekly winning streak ever, and the Dow needs just two more up weeks to beat its all-time record of 11 back in 1964. All three of the major indices, including the S&P500, finished at their highest levels since November 8 – before the market threw its late-year hissy fit over tariffs and interest rates.

All that drama has been thrown by the wayside it seems. As the Fed looks likely to raise interest rates at some point during the next ice age, and hopes of a deal between China and the US continue to rise.

On Sunday Trump said that “productive talks” with China had made “substantial progress”, and that proposed tariff increases set for March 1 would be postponed. Exactly as the Catch Up predicted they would last week.

If the talks continue to be positive there will be a summit at Trump’s home away from home Mar-a-Lago involving himself and Chinese President Xi Jinping. I can’t wait for that one if it ever materialises.

Xi is well known for hating the extravagance of golf courses in China, and has been shutting them down by the hundreds – and they didn’t have many to start with. The country actually banned the construction of new courses in 2004, but it was widely ignored by the local governments. Xi’s government, however, are cracking down,  calling them a ” misuse of arable land” and citing the need for water conservation. Don’t expect to see Xi out on the Mar-a-Lago links in the plus fours. It will be all business.

Retails stocks needed a boost after the Commerce Department released terrible December sales data during the week. And Walmart (WMT) provided just that after releasing impressive earnings despite the conditions. Earnings per share were $1.41 vs the $1.33 expected, while revenue also came in slightly above estimates at $138.79 billion.

Particularly impressive was the retailer’s impressive gains in online sales, which were up 43% for the quarter. Management stated that they have been adding celebrity-inspired apparel and high-end camping gear to its e-retailing business in an attempt to take on the likes of Amazon (AMZN). A tactic that any company worth their salt must apply in this e-world of ours. Unsurprisingly Amazon and chief Walmart rival Target (TGT) also rose on the back of the results.

Kraft Heinz (KHC), the owners of brands such as Wattie’s, Philadelphia, Golden Circle, and Maxwell House, didn’t fare nearly as well. The cheese and sauce providore threw a raft of terrible news at investors after the market closed on Thursday, which saw a plummeting share price and a raft of downgrades the following day.

Firstly, they announced a $15.4 billion write-down largely on the back of the Kraft and Oscar Mayer brands. Secondly, they revealed they had received a subpoena from the Securities and Exchange Commission who announced they are looking into KHC’s “accounting policies, procedures, and internal controls”. And if that wasn’t enough for shareholders, they also cut their quarterly dividend by a whopping 36%.

JP Morgan Chase, UBS, Barclays, Bank of America, and a host of other analysts all downgraded the stock. While Piper Jaffrey stated, ” we are not confident it can build or maintain brand equity needed to compete in today’s consumer environment in a sustainable and compelling way”. Ouch.

Kraft ended 27.46% lower by end of trading on Friday, at an all-time low of $34.95. The Oracle of Omaha, Warren Buffett, won’t be too pleased. His company Berkshire Hathaway owns around 27% of all KHC shares. That calculates to a hefty $3 billion loss for the day. It’s not all bad for Warren, however. He reckons he’s still up on the deal after purchasing his shares cheaply back in 2013 in a private equity transaction. I wonder if he’ll take the opportunity to buy some more shares? I’ll keep you informed if he lets us know.

This week on Wall St is all about the Retail sector, a sector that has seen an increased amount of volatility as the bigger department stores battle with what’s known as the “Amazon effect”. Last week the most shorted ETF in the US was the retail ETF SPDR S&P Retail (XRT). This is despite earnings results in the sector being mostly positive so far.

Those that have been short XRT since December have lost just over 17% so far as the sector has defied expectations. It will be a crucial week for the segment as industry leaders such as Macy’s (M), Autozone (AZO), Best Buy (BBY), L Brands (LB) and Gap Inc (GPS) all report their Q4 results.

At the end of this week, we will be able to see who is faring best at switching their business strategies from bricks and mortar to the online world. Those that have done so successfully will be rewarded with an increase in sales, and these will be the ones we want to hold in our portfolios going forward. Those that have been too slow off the mark need to be jettisoned.

We also have another earnings battle looming this week. In the last few Catch Ups we’ve highlighted the battle of the pot stocks, followed by the Coke and Pepsi war, and this week it’s the “Rumble of the Renovators” as Home Depot (HD) And Lowe’s Cos (LOW) come up against each other.

In January, the leading indicator of remodelling activity, which comes out of the Joint Centre on Housing studies at Harvard University, suggested that spending on renovation and home repairs would gain 5.1% in 2019, which is down on the 7.5% it gained in 2018. Despite this, spending will increase to over $350 billion.

Both Home Depot and Lowes will find it tough to knock off Q4 results from 2017 however, which included the most expensive hurricane season in US history. Harvey, Irma and Maria smashed the US and Puerto Rico, causing over $200 billion worth of damage. It is estimated that Harvey itself caused over $180 billion worth on its own. This is more than the second most expensive season ever, which was $159 billion in 2005 when Hurricane Katrina tore apart New Orleans.

While the 2018 season was slightly worse than average with Hurricanes Florence and Michael doing the rounds, it was nowhere near as destructive as the prior year. Great news for homeowners, but not great news for the companies that profit from people having to repair their homes, i.e. Home Depot and Lowe’s Cos.

Despite this, analysts are surprisingly upbeat on the sector and are expecting solid performances from these two. Home Depot is expected to make $2.16 per share, which is up from the $1.68 it made last year. While those watching Lowe’s want to see $0.79c per share, up from $0.74c last year.

What will be important for both companies is what they offer us in terms of guidance for 2019. As we have seen in recent results you may smash your earnings expectations, but provide poor guidance and the market will punish you. We’ll let you know how the big two perform next week.

In terms of economic data this week, we’ll finally have the 4th quarter GDP result, which has been delayed by the government shutdown. While the Federal Reserve Chair Jerome Powell will appear before Congress to be grilled on the economy and monetary policy. It will be an event that will be closely watched, but I’ll be surprised if he provides any market moving commentary.

Take a look below at the big earnings and data we’ll be watching for the rest of the week.





  • Tuesday: Home Depot, Macy’s, Autozone (AZO), Toll Brothers (TOL), Weight Watchers (WTW)
  • Wednesday: Lowe’s, TJX (TJX), L Brands (LB), Best Buy (BBY), Dean Foods (DF), Fitbit (FIT), Monster Beverage (MNST), Office Depot (ODP)
  • Thursday: JCPenney (JCP), Gap (GPS), Autodesk (ADSK), (CARS), Dell (DELL), Keurig Dr Pepper (KDP),
  • Friday: Foot Locker (FL), KVH Industries (KVH)


Economic Data:

  • Tuesday: Chicago Fed national activity index, Wholesale inventories
  • Wednesday: Housing starts, Building permits, Case-Schiller home price index, Consumer confidence index, New home sales
  • Thursday: Weekly jobless claims, GDP Q4, Chicago PMI, Housing vacancies, Jerome Powell testimony
  • Friday: Personal Income, Consumer spending, Core inflation, Markit manufacturing PMI, ISM manufacturing index, Construction spending, Consumer sentiment index, Jerome Powell testimony, Motor vehicle sales.




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