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A Tale of Two Earnings: Wal-Mart and Target Results Tell Different Stories

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August 18, 2016

(Thursday Market Open) Like an Olympic gymnast sticking a landing, Wal-Mart (WMT) delivered on quarterly earnings early Thursday, beating expectations on top- and bottom-lines.

The better-than-expected WMT earnings came one day after another huge retailer, Target (TGT), reported disappointing quarterly results and lowered guidance, citing “a difficult retail environment.” The contradictory nature of the two reports raises questions, including whether U.S. consumers are making more shopping trips to low-end rather than mid-price retailers, as they did back in 2008 and 2009 during the financial crisis, and whether TGT may be expecting the economy to slow down. We shall see.

Things weren’t slowing down for WMT, which grew same-store sales 1.6% and raised its outlook, saying it’s “pleased at the positive momentum” of its business. The Arkansas-based company reported earnings of $1.07, beating expectations for $1.02 per share. Revenue came in at $120.9 billion, which was better than the $120.1 billion expected. WMT shares rose smartly early Thursday in pre-market trading after TGT stumbled 5% on Wednesday.

Though TGT results raise some questions about consumer health, the strong WMT results, which followed positive earnings from major department stores last week, may hint that some of the job growth seen this summer, along with higher wages and low gas prices, could be bolstering shoppers.

Beyond WMT, the market continues to digest Wednesday’s release of the Fed’s minutes from its July meeting. Judging from the minutes, it appears the Fed wants more data before it makes a move toward higher rates. Several Fed officials wanted to wait until they were more confident inflation would rise to the Fed’s 2% objective after running below target for four years, The Wall Street Journal reported. Others believed the U.S. is close to a fully recovered job market and a rate increase would soon be warranted. Though a few Fed officials are hawkish and want to raise rates as soon as possible, the dovish tone took the day.

What does this mean in regards to future rate hikes? The Fed minutes didn’t really shed a lot of new light. “Members judged it appropriate to continue to leave their policy options open and maintain the flexibility to adjust the stance of policy based on incoming information,” the minutes said.

That puts several coming data points in focus, including August jobs data, August inflation data and August retail sales data, all due in early September before the Fed meets. Housing and auto sales data may also work their way into the Fed’s view as it formulates a decision.

As of early Thursday, the futures market priced in an 18% chance of a September rate hike, above the level seen earlier this week; and a greater than 50% chance of a December hike. Futures have been telling the market for three months that a September rate hike is unlikely, and that doesn't appear to be changing. Remember, the U.S. election comes not long after the Fed’s September meeting, and though the Fed isn’t a political body, it’s possible Fed officials are taking the election into account.

Several Fed officials are scheduled to speak Thursday, and their remarks could provide further insight into the Fed’s economic views. Fed speakers on Thursday include San Francisco Fed President John Williams, Dallas Fed President Robert Kaplan, and New York Fed President William Dudley.

Also on tap today: the government’s release of leading indicators data. Weekly jobless claims early Thursday came in at 262,000, below the 265,000 many analysts had expected.

Over in the oil patch, prices moved above $50 a barrel for Brent oil futures early Thursday for the first time in six weeks as a possible output freeze by major producers continued to grab headlines. U.S. crude prices rose above $47 to a seven-week high. The debate on oil is whether a production freeze at these current high output levels would really mean that much in terms of supply and demand. Saudi Arabia and other OPEC countries have been pumping out the black liquid at abundant rates lately, and U.S. producers have also moved to turn on the spigots, with drill counts rising most of the summer. U.S. crude has mainly occupied a range between $40 and $50 a barrel since April.

Though oil prices are rising, the major stock indices don’t seem to be taking their cue from crude. The corellation between oil and crude is still on the high side, but well below levels seen earlier this year.

S&P 500

FIGURE 1: SUPPORT LEVEL HOLDS AGAIN.

The S&P 500 (SPX), plotted through Wednesday on the TD Ameritrade thinkorswim platform, tracked below the 2175 support level at midday, but recovered to close well above that level and just below an old resistance area at 2183. Data source: Standard & Poor’s. For illustrative purposes only. Past performance does not guarantee future results.

When You’ve Got a Big Project, Call the Pros: A deeper dive into Home Depot’s (HD) earnings, released earlier this week, provides some insight into the broader economy. During its earnings call, the company said that “pro sales” outpaced the “do-it-yourself” business, giving HD more confidence about the second half of the year. “Pros” are contractors, rather than the homeowner, and when people call the pros, it typically means a bigger project that costs more money. It’s never a good idea to read too much into one earnings report, and indeed, HD competitor Lowe’s (LOW) missed earnings expectations, but the takeaway here could be that a growing number of people feel confident enough about their job situations to put money toward major home renovations that require expertise beyond handling a hammer or screwdriver. A new kitchen or bathroom can cost thousands of dollars, and when people are uncertain about the future, they’re often hesitant to spend that kind of money. The trend that HD cited could also be seen as positive for construction contractors and their employees, who conceivably would get more calls when people stop putting off those remodeling projects.

Speaking of Housing: Remember late last year when a Fed rate increase and the prospect of further rate hikes had some investors concerned that home mortgage rates could rise? Seems like a long time ago, doesn’t it? The average rate for a 30-year fixed-rate mortgage with a loan balance of $417,000 or less fell to 3.64% this week, down from 3.65% a week earlier, according to the Mortgage Bankers Association (MBA). That’s near a record low. There’s been talk this week that the Fed could get more aggressive about rate hikes in coming months, which would potentially send mortgage rates up, but that remains to be seen. Whatever the case, home buyers are taking on bigger loans in this long-term, low-interest rate environment, the MBA said. Its research shows that the average loan size for a 30-year fixed-rate mortgage reached $316,000 in June, up from $259,000 in the same month four years earlier. The Fed, in its July meeting minutes released Wednesday, sounded positive about the housing market, saying the sector is likely to gradually improve. “Rising sales of existing homes… stronger demand for residential mortgage loans, and the steady increase in house prices were seen as evidence of rising demand,” the Fed said. “In addition, credit conditions remained favorable.”

Ever Feel Misunderstood? So Does The Fed, Apparently: When the Fed talks, people tend to listen. But they don’t always interpret things the way the Fed wants them to, it would seem from Wednesday’s release of the July Fed meeting minutes. Back in June, the Fed’s post-meeting statement contained some rather dreary language about improvement in the labor market slowing, inflation compensation declining, and business fixed investment being “soft.” That meeting, along with the Brexit vote shortly afterward, helped dash expectations for a Fed summer rate hike, something the Fed acknowledged Wednesday. But maybe the Fed meant its words to sound sunnier, judging from language in its July meeting minutes, which contained this revealing sentence: “Federal Reserve communications released in conjunction with the June Federal Open Market Committee (FOMC) meeting were interpreted by market participants as more accommodative than expected.” Interesting to think even the Fed sometimes has trouble getting its point across.

Good Trading,
JJ
@TDAJJKinahan

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JJ Kinahan

JJ began his career in 1985 as a Chicago Board Options Exchange...

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