Earnings Season & Mobile Shopping by RichardsonGMP
Yarra Square Partners returned 19.5% net in 2020, outperforming its benchmark, the S&P 500, which returned 18.4% throughout the year. According to a copy of the firm's fourth-quarter and full-year letter to investors, which ValueWalk has been able to review, 2020 was a year of two halves for the investment manager. Q1 2021 hedge fund Read More
Overseas markets are higher, futures are a little above the zero line, bond yields ticking up, the stage is set for the Democratic National Convention. Big week ahead, we have the Fed meeting Wednesday, Q2 GDP released on Friday and the world’s largest company reporting earnings tomorrow.
Q2 earnings season is progressing nicely with about ¼ of the S&P 500 companies having reported. The positive surprise rate is 80%, higher than usual, and revenue surprises are 60% on the good side, that is higher than usual as well. Positive surprises are most prevalent in tech, financials, health care and consumer sectors. Results are a little lacking in both energy and materials. Turning to growth, the aggregate numbers or roughly flat at the moment. Energy is the big drag, although financials and tech are not helping either. The biggest positive is consumer discretionary, boosted by autos. Overall a good start to the season. One positive aspect that has not been evident in some time is the trade weighted US dollar has been lower in Q2 than Q2 in 2015. That certainly helps those multinationals.
While earnings growth may be returning, it may be needed given valuations are rather elevated. Not alarming levels but certainly not a cheap market. The US market is trading 17.2x forward 12 month consensus estimates while Canada trades at a slight premium of 17.4x. A little earnings growth would help. One reason for elevated valuations is low bond yields, again a risk should yields move higher.
Mobile shopping has overtaken purchases made on computers according to Demandware, a subsidiary of Salesforce.com. Smartphone purchases accounted for 45.1% of all online purchases last quarter, edging out computer based sales. Total purchases made on smartphones has tripled in the past three years as merchants are teaming up with services like Apple Pay and PayPal to help consumer complete transactions on mobile devices. The cumbersome checkout process still provides ahead wind for mobile sales, as it is 11% less likely for a customer to actually complete a transaction on the phone compared to using a computer.
Foreign Buyers of US Homes
A weakening economy and a depreciation Yuan have not phased Chinese buyers. For the second year in a row, they were the number one foreign buyer of US real estate, “with purchases of 29,195 homes totaling about $27 billion from April 2015 through March 2016.” Canadian buyers came in second at 26,851 homes; however, the value of their purchases was only $9 billion. There are a few trends driving purchases from China. First, there is strong demand from recent immigrants. These people come to America ready to buy. Real estate is a natural choice because “home ownership is a very important part of their dream in their newly adopted country.” Higher education is also playing a role. “13% of Chinese home buyers bought houses and condos for their children to live in while at college in 2015-16.”
The will to diversify away from the domestic economy is also a factor. Chinese buyers realize that their economy is decelerating. As such, they are turning to foreign assets for safety. In response, China is trying to reduce the amount of capital leaving the country. That may be the reason that 61% of Chinese home buyers in 2015-2016 were US residents. More from Barron’s here.
Dog Hates Being Flipped Off. Via UNILAD
Yahoo! Inc. is being purchased by Verizon for $4.8bb in cash. The deal includes all Yahoo real estate and most of its intellectual property but excludes their stake in Alibaba and Yahoo Japan. Yahoo web services still attract 1bb monthly active users. Nintendo shares are down near 20% in overseas trading this morning after the stock seems to have overheated, nearly doubling on the back of early success of the application the company has a 13% stake in. Suncor is hoping to maintain their current emission level through 2030 while increasing production. They hope they can cut emissions by 30% per barrel to achieve this goal.
Gold prices are lower this morning as stocks continue their rise overseas. The FED meeting this week is likely to be the next catalyst for the yellow metal, which could take another hit if Janet Yellen and company imply that a rate hike could be closer than the market is expecting. The chances of a hike this year have grown to 45%, up meaningfully from the 12% chance that was being priced in at the start of the month. Higher rates reduce the allure of gold which has no yield. These factors are not weighing on nickel prices, which are trading near a one year high. Falling inventories, increasing demand from China and reduced output from the Philippines has boosted the RSI index above 70 for the metal. Oil prices are hitting the lowest level in two months after U.S. E&P companies increased drilling last week despite ample supply.
Fixed Income And Economics
There is no meaningful data, Fed-speak or auctions to talk about today so markets are expected to trade sideways until Wednesday’s FOMC policy meeting update. Futures currently predict a 10% likelihood that we see a tightening move that while still seems low, is significantly higher than the 8% probability from 10 days prior and the zero chance prices in on July 1. In all seriousness though, we’re not likely to see a hike but the market will be closely parsing the statement for any signal pointing at a higher inclination to resume rate normalization in the upcoming months. Two major developments have occurred since officials met six weeks ago. One, the Brexit vote came and went that caused a spike in market volatility and concerns over a confidence shock on the UK’s economy and potential spillover elsewhere. These concerns have abated entirely with the prompt return to political order in Britain and evidence suggesting limited stress from the event on the financial system. Secondly, the U.S. employment situation came back in full force in June to make the weak May result appear to be an aberration. Next Friday’s NFP report is calling for a +175K increase to hiring and a resumption to “normal” activity. Something to watch for will be whether any dissenters in the voting pattern re-appear after the June meeting saw all officials make a unanimous decision. Benchmarks are completely flat at time of writing with the price of WTI (down another -1.3%) taking most of the focus of markets.
As high yield bond markets continue to soar with the risk rally, we saw last week that not all is rosy in the flower patch. Privately held trucking company U.S. Xpress Enterprises Inc. was forced to pull a USD $320MM high yield bond deal after investors demanded a coupon 200 basis points more than originally anticipated. Wholly-owned by Mountain Lake Acquisition Co., the trucker had been looking to take advantage of a credit-market rally (+12% in junk markets this year), improving earnings and better credit ratings to refinance debt at more favorable terms, the company said in an e-mailed statement last week. Bloomberg reported that the original deal circular saw the company market the offering at around 9% last week, that was promptly pushed to 11% after initial interest proved to be lukewarm. The struggles mark another chapter in the company’s checkered history in credit markets which includes a scrapped bond offering in 2013 and a failed loan deal in the weeks following the terrorist attacks in September 2001. Proceeds of the B+ rated eight year deal were to have been used to retire a $244MM term loan due in 2019.
Chart Of The Day
Quote Of The Day
Why do they call it rush hour when nothing moves? – Robin Williams