18 Jun Capital 19 Catch-Up – Jun 18

The major indices inched higher last week as investors weighed disappointing economic data coming out of China with an impending Fed meeting which will likely deliver news on when we can expect a rate cut. The Nasdaq fared the best of the three with a 0.7% gain, while the S&P500 and the Dow added 0.5% and 0.4% respectively.

The FOMC meet on Tuesday and Wednesday of this week, which will be keenly watched on Wall St, despite the fact that no one is expecting a rate cut this month. However, many will be hoping to hear a more dovish tone in Jerome Powell’s press conference on Wednesday afternoon.

The next cut will be the first since Ben Bernanke dropped the rate to 0.25% back in December of 2008. After which the Fed held fast for seven years until they started raising them again in December 2015. Now, many expect the next cut to be in July at the earliest as the Fed board hold fire for the moment.

They don’t want to seem too eager to drop rates. They only finished raising them back in December and any reversal will make it seem like they made the wrong decision. They also have Trump doing his best impression of a back seat driver, telling them that the stock market would be “10,000 points higher” if rates were lower. They don’t want to be seen to be pandering the President. They are meant to be independent.

G20 Summit

There’s also the G20 summit at the end of July, and a potential meeting between Trump and Xi which could potentially (even though it’s unlikely) bring an end to the trade war between the US and China. Add to this revised retail figures coming out last week (April’s retail sales) which improved the look of the economy substantially, and you get the feeling the Fed may be holding out for some further data improvements to fend off any talk of a cut.

Slowing global growth may play a larger factor, however, and China showed signs of cracking last week as industrial growth came in at a 17 year low of 5% in May. Economists were expecting around 5.5%, but it looks like the trade war is having a quicker impact than many realise, prompting calls for the government to inject more stimulus before its too late.

Technology

Technology stocks suffered from the disappointing Chinese data, which was also exacerbated by Broadcom’s (AVGO) poor earnings result. The chipmaker lost 5.57% after missing revenue estimates and lowering 2019 guidance citing slowing demand and the Huawei ban implemented a few weeks ago by the White House. Intel (INTC), Skyworks (SWKS) and Advanced Micro Devices (AMD) lost 1.09%, 2.11%, and 3.28% respectively, while the semiconductor ETF SMH (SMH) lost 2.49%.

Retail

It was better news for the retailers as the athleisure wear maker (yes athleisure is a word – I looked it up in the dictionary) Lululemon (LULU) smashed profit and revenue estimates, just as we predicted in last week’s Catch Up. That’ll happen when you charge $200 for a pair of tracksuit pants, and people are silly enough to pay it. Fair play to them though. They saw a niche area that was growing and have dominated it since its inception. Now you’ve got every second mum wearing yoga pants to do the school pick up. I can now see LULU branching out into all types of clothing, improving on competitor products, and being able to charge more because of the successful brand name. They could well be the Apple (AAPL) of yoga wear.

IPOs

We also saw another couple of successful IPO’s last week. The most awaited being online pet retailer Chewy Inc (CHWY) who starred on Friday’s debut, jumping 59% for the day to close at $34.99 after its IPO price sold at $22 per share.  The company, which sells pet food, supplies, and pharmacy items, is majority owned by PetSmart who sold 40.9 million shares into the IPO compared to Chewy’s 5.6 million shares.

Cybersecurity company CrowdStrike (CRWD) debuted on Wednesday and gained 71%  from its IPO price. While Freelance services provider Fiverr International (FVRR) was up 90% after its IPO on Thursday, before falling 21% on Friday.

It was good news for future IPO’s hitting the market in the second half of the year in what has generally been a rocky start. Uber (UBER) and Lyft (LYFT) are still substantially lower than their IPO prices from earlier in the year, while online image board company Pinterest (PINS) is trading up at $27.41 after debuting at $19.

Beyond Meat (BYND) has by far the outstanding IPO of the year. Their IPO priced at $25 per share on the debut in mid-May and are now worth a whopping $151.48. That’s a handy 505.92% for anyone lucky enough to get in on the ground floor. They make burgers with no meat in them, and they’ve never made a profit. I must admit I didn’t see that one coming. Vegetarians and vegans make up only approximately 5% of the US population so that’s only a tiny sector to market to, however, Beyond Meat is actually targeting the carnivores amongst us in a hope that we choose to move to a more sustainable food source. I’m slightly sceptical, but then again I’ve never tried how they taste, so who knows? And in 10-15 years time when climate change wipes out our meat industries, we might all be eating non-meat meat. You’d think they’ll have plenty of competition by then though. I won’t be buying any stock at this point, but I’ll be keeping a close eye on their performance.

Earnings

Earnings are really winding down now as we are only weeks away from the third quarter. Although we still have a few interesting results out this week. We have IT solutions provider Oracle (ORCL) on Tuesday and used car retailer Carmax (KMX) on Friday. But I’m most looking forward to seeing software and operating system builder Red Hat (RHT) improve on its stellar last twelve months, after a breakout quarter in October last year. We’ll be looking for $0.86c per share profit and revenue upwards of $925 million.

On the data front, all eyes will be on the FOMC meeting early in the week, but we’ll also see housing starts on Tuesday, and Manufacturing and Services PMI for June on Friday. And over the Atlantic, there will be more toing and froing over who will be the next British PM – and how he or she will achieve an orderly Brexit – good luck with that!

Check out below for more details on earnings and economic data for the following week.

Cheers, Paul.

Earnings:

• Tuesday: Oracle (ORCL)
• Wednesday: American Outdoor Brands (AOBL)
• Thursday: Darden Restaurants (DRI), Kroger (KR), Micron Technology (MU), Red Hat (RHT)
• Friday: Carmax (KMX)

Economic Data:

• Tuesday: Housing Starts, FOMC meeting begins
• Wednesday: FOMC Decision, Powell speech
• Thursday: Weekly jobless claims, Current account, Philly Fed index, Leading indicators
• Friday: Flash manufacturing PMI, Flash services PMI, Existing home sales