(Tuesday Market Open) Yes, it’s still August and the lull of a lethargic summer appears to still be hanging over the markets, which had its most sluggish trading day all year yesterday. Are the markets on track for another day of sloth?
In the early going, the three major market benchmarks were moving to the downside, with the likes of shares of Apple (AAPL) and Abercrombie & Fitch (ANF) turning negative. AAPL likely because of its new tax issue in Europe (see below) and ANF likely because of its earnings matters. ANF turned in a loss of $0.19 a share, which was a penny better than Wall Street’s expectations, but said same-store sales, a key industry metric, tumbled 4% in the quarter. Moreover, ANF said the back half of the year will “remain challenging.” Shares fell 13%.
According to MarketWatch, Arthur Martinez, ANF’s executive chairman, cited “traffic headwinds in the domestic mall business” and a “significant drop-off” in tourism. “We do not see those headwinds materially changing in the next few months," he said in an interview. Will that be an issue for other apparel retailers ahead?
Yesterday’s mini rally ended a three-day losing streak that was marked first by the anticipation of Federal Reserve Chair Janet Yellen’s Friday speech in Jackson Hole, and then by the message, though barely audible, that an interest-rate hike could be on the table as soon as next month’s meeting. Did traders absorb the inevitable over the weekend?
If the CME FedWatch tool is any indication, maybe they did. Ahead of Yellen’s talk, traders bet the probability of a higher rate at the Sept. 20-21 meeting at 18%. After she spoke, it jumped to 33%. This morning, it sat at 21%. The probability of a December hike sits at about 54%, the first time this year that it’s above the 50-50 level.
Financials, not surprisingly, led the advances though the volume was notably light. Some 4.9 billion total shares were traded on the markets Monday, the lowest such count since Dec. 30, according to the Wall Street Journal. Typically this year, shares change hands at a daily average of about 7.5 billion.
At Monday’s close, the Dow Jones Industrials Average (DJIA) was higher by 107.59 points, or 0.58% to stand at 18,502.99, while the S&P 500 (SPX) tacked on 11.34 points, or 0.52% when it settled at 2,180.38. That was its biggest one-day move since Aug. 5 with all 10 of the sectors in the green.
The Nasdaq Composite Index (COMP6) piled on 13.41 to finish at 5,232.33, up 0.26%.
Here’s where crude oil price run opposite stocks: When there’s talk of higher interest rates. Oil is priced in dollars and when interest rates climb, the dollar typically does as well. That can create cost issues for traders using currencies besides the dollar. West Texas Intermediate (WTI) closed below $47 a barrel on the New York Mercantile Exchange to $46.98, off 1.4%, or $0.66. Traders say they expect to see oil prices in the $46.00-range until at least late September when there’s an informal meeting of members of the Organization of Petroleum Exporting Countries scheduled. In the early going, WTI was tipping just over $47.00 a barrel.
The Consumer Is at It Again. That stalwart of a growing economy, the consumer, opened wallets and pocketbooks the country over last month, ringing up retail sales for the fourth straight month, the Commerce Department reported. Spending inched up 0.3%, lower than June’s 0.5% climb but significant nonetheless because of what it represents: Consumers who are willing to buy things to keep the momentum of growth going. It helped, too, that incomes rose. In last month’s case, consumers mostly bought big-ticket items, like autos, in lieu of the more basic needs in life, like food and clothing. Remember that consumer spending is what drives two-thirds of economic growth.
Meanwhile, the personal consumption expenditures (PCE) price index, what the Fed prefers to use to gauge inflation, edged higher by 0.1%, excluding food and energy, whose prices tend to be jumpy. Since the beginning of the year, inflation is holding steady at 1.6%. The Fed has tagged 2% as the inflation rate it would need to see before it raises rates. Fed hawks, however, say 1.6% is good enough. Is it? Time—between now and the September meeting—will tell.
The Grocery Store Cometh Back? Maybe, according to Wells Fargo. In a report Monday from the bank’s Economics Group, the grocery-store retail sector that was crushed by the parade of warehouse club and superstores marching across the U.S. the last three-plus decades, is starting to pop back to life. “A sector that has started to make an important comeback, especially compared to what has happened during the decades before the Great Recession, has been the grocery-store industry,” according to the note to clients. “Growth in this industry has resumed after several decades of almost stagnation.”
Does that mean warehouse clubs and supercenters are losing their one-stop shopping edge? Hardly, by Wells Fargo’s reckoning. Warehouse clubs and supercenters are still growing, albeit at a much slower pace. The likely reason grocery stores are gaining favor is urbanization, the shift out of suburban living to inner cities, both big and small. “Maybe, the grocery industry has seen the worst in terms of lost market share vs. the warehouse clubs and superstore industry,” the report stated. “This may be related to demographic and generational changes, as millennials have chosen to live closer to downtown areas where warehouse clubs and supercenters’ locations are not that common.”
What sector is still hurting in retail are department stores and discount department stores, according to the report. “Sales remained under pressure and have continued to go down since 1992, unabated,” the report states, noting the sector as a distribution channel has “suffered the brunt of the warehouse club and supercenter success.”
Apple Smacked. To the tune of $14.5 billion, a hefty price tag by any measure, but may be a drop in the bucket to Apple (AAPL), which is sitting on some $250 billion in cash in Europe alone, according to the company. Still, some analysts insist, it’s the message—and the potential strain in relations between the U.S. Treasury and the European Union that makes this story’s headlines. Here’s the core of the news: The EU ruled Tuesday that Ireland must claw back the billions in unpaid taxes over a 10-year period. AAPL got illegal tax breaks that allowed the software giant to pay 1% to almost zilch on its European profits, according to the EU, because Ireland gave it preferential treatment. Ireland doesn’t agree and said it will appeal the decision “to define the integrity of our tax system,” according to the Wall Street Journal. AAPL says it will appeal as well. It is the largest lump of cash the EU has ever sought to recover and appears to be stirring a tiff between the U.S. and EU over who has the right to control tax payments, and may itself become an election-year issue, according to published reports.
“U.S. companies are the grandmasters of tax avoidance,” Edward D. Kleinbard, professor at the Gould School of Law at the University of Southern California, and a former chief of staff to the congressional Joint Committee on Taxation, told the New York Times. “Nevertheless, because of the nature of U.S. politics,” he said, the Apple case “will be framed by the U.S. as Europe overreaching and discriminating against ‘our team.’ ”
Any suits may take years to settle and some analysts worry about the implications to other mega U.S. multinationals abroad. Will this be an overhang on AAPL?
Meanwhile, AAPL appears to be planning a not-so-secret surprise. As is tradition, AAPL sent out invitations Monday to a “special” Sept. 7 event. What it’s about is hush-hush and during the Steve Jobs’ days, it many times was and stayed that way. Remember the unveiling of the iPad, not to mention the iPhone, or even as far back as the iPod? But many analysts think they know exactly what this event is about and it’s the iPhone 7 Plus and may include updates to the Apple Watch. Gene Munster, an Apple analyst at Piper Jaffray notes that expectations for something super-duper are so low that any incremental features could be viewed as positive.
Here’s what he’s hearing: “The biggest design change is likely the removal of the headphone jack, in favor of wireless Bluetooth headphones or headphones that use the lightning connector. Other reports suggest that the iPhone 7 Plus may have a dual lens camera, which will enable higher quality photos. Beyond those two items, we also expect a better processor, better memory, and potentially increasing the 16GB storage to 32GB.” Chew on this: If AAPL replaces the headphone jack with something wireless, all those headphones iPhone users already have will be useless. Ca-ching.
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