We are seeing the U.S. economy try to break out and give investors good news via upticks in activity but a major headwind could be on the horizon and arrive sooner than expected if the politicians in Washington do not soon get their act together. The first proposal from the White House to lawmakers essentially calls for $1.6 trillion (yes that is a trillion with a T!) in tax cuts to expire while increasing stimulus spending by $50 billion. Depending on one's view of economics and their political views, it is conceivable that you could believe that allowing tax cuts to expire is cutting an expense and by allowing the expiration you suddenly create revenues. It does not work that way, as people will simply reallocate their capital in the most tax efficient manner. Lawmakers make laws only to have rich people pay intelligent people to find ways around them. We will need to see further real cuts to spending that are not opportunity costs but actual programs and move figures from the expense section of the income statement. That is when Republicans will come to the negotiating table and we can finally avoid this fiscal cliff.
We have economic news due out today and it is as follows:
- Personal Income - 0.2%
- Personal Spending - 0.1%
- PCE Prices Core - 0.2%
- Chicago PMI - 50.7
Asian markets finished higher today:
- All Ordinaries - up 0.62%
- Shanghai Composite - up 0.85%
- Nikkei 225 - up 0.48%
- NZSE 50 - up 0.83%
- Seoul Composite - down 0.10%
In Europe markets are higher this morning:
- CAC 40 - up 0.20%
- DAX - up 0.27%
- FTSE 100 - up 0.08%
- OSE - down 0.07%
Shares in OCZ Technology Group (OCZ) have been moving a bit lately and yesterday rallied higher by $0.33 (24.44%) to close at $1.68/share. This is a stock which we are long via our retirement portfolio and unfortunately purchased right before the final drop of its fall after having been bearish on it before that. It is a long-term play, but the pop yesterday was nice nevertheless. The shares moved higher after a Reuters article (see here) discussed what the company has done to rectify the issues which were the cause for the sell-off in shares a couple of months back.
Yesterday shares in Zynga (ZNGA) closed at $2.62/share in regular trading but fell $0.33 (12.60%) in the after hours session as the company filed documents with regulators which showed that it altered the agreement with Facebook regarding the gaming agreement between the two companies. No longer will Zynga receive preferential treatment on Facebook's platform, but it also will not have to use Facebook's payment system on the Zynga gaming site or face the same restrictions on the development of its own site. Some analysts were trying to spin this as not a negative, but in the short-term it has to be and if it causes further employee defections and loss in morale we could see it become a serious long-term issue to. It appeared yesterday that shares had established a new uptrend, but then after the market closed this news came out which should put an end to the bullishness.
We saw many retailers go red yesterday as same store sales were released and investors were able to see the true impact of Sandy on economic activity in the northeast. One of our favorite retail plays which has been quite rewarding for readers since we recommended it in the teens is Gap, Inc (GPS). The company released their same store sales data yesterday and disappointed as they missed expectations, however the company stated that it is expecting the time around Christmas to be strong and make up for any of the weakness seen early in the quarter. The company's namesake store led the way in sales gains in the month of November and we are hearing that the Gap, Banana Republic and Old Navy brands are highly requested on Christmas lists this year among the all important teen crowd. The shares finished down $1.46 (4.08%) to close at $34.36/share. So far the strategy of buying this one on dips has worked, so we will reiterate that shares in Gap are a buy in times such as these.
One retail stock which deserved to fall yesterday was SUPERVALU (SVU) which finished lower by $0.52 (18.57%) to close at $2.28/share. The stock has gravitated higher as there has been little news on the sale of the company and investors assumed the deal was getting done. Well as it turns out it is not going so smoothly, according to reports which surfaced yesterday. It seems the private equity suitors are not finding the financing they want as the banks are hesitant to allow this entity to be loaded up with debt in a leveraged buyout due to the deteriorating business and falling revenues. If you cannot get Goldman Sachs to sell your company you have major issues…these are after all the same guys who sold worthless securities to the brightest minds for ungodly profits only a few years ago.
One retailer to watch today is Ulta Salon, Cosmetics & Fragrances (ULTA), another one of our favorite retail plays these days. The stock has been stuck between $90-100/share over the past few months and we feel that it is not a top as some would have you believe but rather a base being built for the next leg up. After last night's earnings we are inclined to believe that is most certainly the case as the company announced that they plan to open roughly 125 new stores next year to continue their expansion into new markets while also building out their presence in current markets. The company exceeded analysts' expectations on both the top and bottom lines for the past quarter and management indicated that they are bullish on the current quarter. We love the concept, strategy and execution here and think shares could see 20% upside with a strong Christmas holiday shopping season.
Disclosure: I am long OCZ.