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Retail Delivery: Stores Keep Beating Expectations, Raising Holiday Hopes

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November 17, 2017

(Friday Market Open) After Thursday’s big rally, things look a bit calmer early Friday, but the market is still buzzing over a series of stronger-than-expected earnings results from big and small retailers alike that brought hope for a solid holiday season.

It’s been a while since we reported a new all-time high for any of the major indices. That stretch ended Thursday when the Nasdaq hit an all-time peak. Other major indices also scurried back from recent losses amid robust retail earnings and passage of a tax bill in Congress. Stock indices fell in pre-market trading Friday morning, however.

The earnings calendar today is lighter, but Foot Locker (FL) shares are on a rampage, up 20% in pre-market trading after FL beat Wall Street consensus estimates for earnings and revenue. Same-store sales fell, but not as much as analysts had expected. Remember, this is a company whose shares have been struggling all year due to various competitive issues. FL said in a press release it expects to meet or “modestly exceed” its previous Q4 guidance.

Other retail earnings since yesterday’s closing bell also looked good with Gap (GPS) beating Wall Street analysts’ estimates pretty much across the board. Same-store sales looked particularly strong. Ross Stores (ROST) also outpaced Wall Street’s projections on all fronts, including same-store sales. Shares of both firms ticked up in post-market trading. Williams-Sonoma (WSM) shares also got a late-day boost from its earnings report, and Abercrombie & Fitch (ANF) shares also jumped as the retailer reported better than expected results.

In sum, retailers are batting close to 1,000 (pardon the baseball term, which means “perfect”) this week, with the exception of some disappointment from Target (TGT). Black Friday is straight ahead one week from now, so we’ll see if the strength carries over. As much as we’ve been fretting over retail, it’s a real bright spot to see better results from some of these stores that have been struggling in shopping malls.

Looking beyond earnings, Chicago Fed President Charles Evans gave opening remarks this morning at a community bankers symposium. Earlier this week, Evans expressed concerns about continued low inflation, saying that unless the Fed addresses falling inflation expectations, “we could be in for the kind of trouble that Bank of Japan has faced for so long,” Reuters reported.

CME futures continue to show 91% odds of a rate hike before the end of the year, with a 50% chance of an additional hike by next March.

Volatility eased early Friday, as the VIX fell below 12. This is a pattern we’ve seen again and again this year: A brief jump in VIX to 14 or 15 followed by a quick drop back toward 10 or 11. We’ll see if VIX continues to stay relatively tame.

Meanwhile, crude oil, which had been sliding the last few days, popped back up early Friday and rose more than 1%. Still, the market is on pace to fall for the week. Overseas markets were mostly higher Friday as the Nikkei continues to shine. It’s up about 1,000 points over the last month.

On the corporate news front, Tesla (TSLA) drove into the headlines with the unveiling of its automated semi-truck. The stock seemed to get a slight charge from the news, but nothing too shocking. Analysts who follow the car market expressed mixed thoughts on how successful this vehicle might potentially be in penetrating the freight market. It certainly looks like nothing else on the road.

Getting back to earnings, Wal-Mart (WMT) led all comers yesterday, shooting up 10% to nearly $100 a share after the company delivered on just about every conceivable metric in Q3. A lot of the focus zeroed in on the company’s Q3 online sales, which gained 50% following a 60% rise in Q2. It looks like WMT’s investment in its Internet business is really paying off, and that it can play on the same field with Amazon (AMZN).

This isn’t the first time in recent months that a major name like WMT posted huge percentage gains in a single session. Back in July, Boeing (BA) shares rose 8% after it reported Q2 earnings. What this might tell us is there’s a lot of investor money still out there and ready to get injected into big-name companies when they look healthy. It also could mean the long rally, which skidded a bit over the last week until Wednesday, may continue to have some zip.

Over in tech, Cisco (CSCO) jumped 5% after the company appeared to impress investors with its fiscal Q1 earnings. The company seems to be making hay with its security business, which shouldn’t be too surprising in this day and age of computer security concerns.

The other major splash Thursday came from Capitol Hill, where the House passed a Republican tax cut plan with plenty of votes to spare. That one is far from out of the woods yet, as the Senate version differs in key ways and the Republican margin in the Senate is rather thin. There was talk late Thursday that Republican senators might try to get a vote scheduled by early December, but then, even if it passes, the bills would have to go into committee. That process is sometimes messy, but this isn’t a political column. The only thing left to say is there’s a long way to go and investors shouldn’t get too excited just because of Thursday’s vote.

In another development on the media front late Thursday, Dow Jones reported that Comcast (CMCSA) is in talks to buy parts of 21st Century Fox (FOXA). If this sounds familiar, it’s because just a week ago rumors surfaced that Walt Disney (DIS) had engaged in talks with FOXA. News reports had CMCSA interested in the same assets of FOXA that DIS had expressed interest in. Regulatory issues might be an area of conflict in either possible deal.

Thursday probably represented the last really big earnings day for a while, meaning the market might struggle to find catalysts in coming days. Black Friday might be the next big event that could provide people something solid to trade on, followed by the payrolls report early next month and then the Fed’s meeting in mid-December.

Oil production

FIGURE 1: THAT 1970'S FEELING.

This chart shows U.S. crude oil production from late 1973 through the present day, with the 2012 production level represented by the 100 mark. Last week, production hit an all-time weekly high, though the all-time high over a full month back in 1970 was slightly above current levels. Either way, it’s easy to see how quickly output charged back from lows of a decade ago. Data source: Federal Reserve's FRED database. FRED® is a registered trademark of the Federal Reserve Bank of St. Louis. The Federal Reserve Bank of St. Louis does not sponsor or endorse and is not affiliated with TD Ameritrade. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

1970 Time Machine for U.S. Oil? Back in November 1970, when Richard Nixon was in his first term and the Beatles had just broken up, U.S. oil producers reached their all-time high output of 10 million barrels a day. Last week, production of 9.6 million barrels a day was the highest since then, and the top weekly level since weekly reports began in 1983. To put that in perspective, it’s nearly twice the production seen back in 2007 and 2008, when oil output from places like Texas seemed to be in a permanent downward spiral and some weeks yielded less than 5 million barrels a day.

The question is whether production can once again hit 10 million barrels daily, but a lot of that might depend on where prices go from here. The recent surge in production, up 1 million barrels a day from last year’s lows, came as prices rose from the low $40’s back in August to the high $50’s earlier this month. The U.S. oil rig count is up 339 from a year ago, according to Baker Hughes, and we’ll get the updated weekly number later today. Last week saw a rise of 9 rigs. Energy sector shares took a dive this week as oil prices descended, but the higher production and lower prices might provide a boost for some of the transport stocks.

Airlines Still Ailing: Speaking of transports, airline stocks haven’t really taken off this year, and some are down dramatically. You can look at any number of reasons, from a decline in the U.S. dollar that might be depressing overseas travel to higher fuel costs to continued concerns industry-wide about competition and falling unit revenue. About a week ago, airlines appeared to be on even shakier ground as oil prices seemed headed toward $60 a barrel. This week’s pressure in the oil market helped give some airline stocks a boost, but it’s still important to focus on what’s ahead. While price-to-earnings ratios are starting to look rather low, some analysts expect additional weakness in Q4 airline earnings amid margin pressure. One school of thought is that as larger airliners continue to consolidate operations, mid- and smaller-size airlines might face further pressure.

Losing Sleep Over Dividends? Investors looking for yield from their stocks can be forgiven if they feel a bit anxious about General Electric’s (GE) recent 50% dividend chop. While there’s no guarantee that other companies won’t follow suit, one thing to keep in mind is that companies whose prices are stable tend to not cut their dividends. It’s also important to research a company before purchasing its shares for the dividend, especially when it’s one that doesn’t have a long history of paying dividends (unlike GE). Consider looking for signs of a strong business model. Is the company investing in new products and research and development? If so, it could indicate it’s doing the right things to keep payments flowing to investors over the long haul. In any case, be prepared and don’t be afraid to do a little homework.

Good Trading,
JJ
@TDAJJKinahan

Economic calendar

FIGURE 2: THIS WEEK'S ECONOMIC CALENDAR.

Source: Briefing.com

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