From Sublime to the Slammer By Charles Payne
Long/Short Equity, Portfolio Strategy
Seeking Alpha Analyst Since 2009
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What a bizarre session. Yesterday had it all, from a scandal of unprecedented proportions (at least that's what they're saying on the other side of the Atlantic) to America reaching an unprecedented status with respect to the debt ceiling (we've hit the ceiling before but that was trillions of dollars below the current ceiling) and not-so-unprecedented anxiety in financial markets. I still can't get over the hot water Dominique Strauss-Khan finds himself in. The managing director of the IMF got to spend the night at Riker's Island in New York, sure to be an eye-opening experience. Maybe he'll chat up a couple of the young kids sitting there born into a world void of hope. Maybe a couple of the guys looking at long prison bids can bend the IMF chieftain's ear about real life and squandered opportunities.
Ironically the IMF didn't miss a beat, approving an extra $2.24 billion in funds for Ireland bringing the total to $10.19 billion.
The rest of the financial world is completely off beat as the rhythm of the rally is being drowned out by screeching sounds coming from all angles. It feels like many things, but one main area is a lack of leadership as key tech names (AAPL, AMZN, GOOG) are under increasing pressure. There are questions about our growth even though there was a collective yawn when the final 1Q11 GDP number came in at just 1.8% but there has been a cloud over the market since then. The strong dollar is hurting multinational companies whose underlying stocks have carried the market higher, simultaneously adding a sheen of quality/credibility to the veneer of the rally. There is the collapse of some commodities standing as an example of just how quickly things can turn from great to horrendous.
Like the weather in New York, it is simply gloomy. It gets like this from time to time and it could morph into something more sinister. I don't think there are longer term ramifications from this melancholy mood but the rally was built on thin volume which means sideways isn't a long-term option. Market bias is slightly to the downside now but panic hasn't set in yet. Selling still happens on more volume than buying, so emotions to bail are much firmer than the fear that the train is leaving the station. This all comes back to question marks... an ocean of question marks. One thing that was answered is the notion that the nation would crumble the day we hit the debt ceiling. We hit it yesterday and the earth stayed on its axis.
The parabolic move in the debt ceiling is striking. It was first increased on June 25, 1940, to $49.0 billion at the onset of WWII. Then on April 3, 1945, to $300.0 billion to help offset the economic strain of WWII. Certainty those were noble hikes considering the amount of fraud and waste alone these days there is no equal moral imperative. The first "temporary" hike came in 1954. I still believe some kind of deal is going to be hammered out and the debt ceiling will be raised again but fear tactics lost some of their sting yesterday - our world didn't come unglued.
The Spotlight and Stopwatch
The spotlight is shining brightly on lawmakers and the task of chipping away at our debt. Chipping away might be the right way to describe tepid suggestions like cutting farm subsidizes ($360.0 B/10 yrs), Defense budget ($400.0 B/10 yrs), selling 4,500 tons of gold for $193.0B, selling $500.0B in land (the government owns 650 million acres or 1/3 of the nation's land and that is simply outrageous), and selling some of the 70,000 office buildings owned by the federal government. These nitpicky cuts are important financially and symbolically but don't even put a dent in the real problem. The spotlight is on and the stopwatch is ticking loudly. Will Washington stop playing games or come through with tough solutions?
While it's time to get down and beyond, brass tacks fear-mongers may have to deal with another unfortunate dose of reality. When allowed, the business cycle is a monster and can do magical things. Yes, we have to clear debt or we run into a brick wall sooner rather than later. Using that to justify tax hikes has been a significant barrier to true spending reforms. But higher taxes hurt recoveries and damp job creation. In California, there is bittersweet news that a rebound in the economy also known as the business cycle has resulted in a new deficit number of $9.6 billion down from $15.4 billion. This puts Jerry Brown in an awkward position. Spending cuts coupled with a natural rebound in state revenue could already be in motion.
One part is already happening. The other could happen if there is admission, if only within his inner circle, that Brown's tax hikes are more punitive than economic reasoning.
Today's Session
The Hewlett Packard (HPQ) debacle will weigh heavily on tech stocks which were very vulnerable coming into the session. Last night shares of the company's stock got hit after a leaked memo revealed a sense of desperation. That memo forced earnings to be posted early. Results were better than expected but there is a cloud of anxiety that this is a rudderless ship spiraling violently toward menacing rocks. Despite the HPQ soap opera, equity futures were higher but have since come down and are gaining momentum to the downside. An earnings beat from Wal-Mart (WMT) will not counteract this negative momentum at least not at the open.
Housing data this morning missed consensus by a mile. There was a time when you could spin decreasing housing starts as a plus and considering inventory levels it is probably smart to slow the pipeline of new homes but it is not a good look for the broad economy.
Retail Rundown
By: Brian Sozzi, Equity Research Analysts
Market Doesn't Know What to Do with Wal-Mart's Report
Early risers are displaying mixed emotions on Wal-Mart's (WMT) 1Q12 numbers. An initial decline in the share price has reversed course ever so slightly. I think the report was adequate at best (meaning it matched or modestly exceeded overall expectations); it was obviously pleasing to the eye that EPS beat consensus by $0.03 and 2Q12 Wal-Mart U.S. comp guidance was established in a range as to suggest traction is in fact "gaining momentum." However, for every positive facet of the quarter there seemed to be twice as many negatives.
1. Another negative Wal-Mart U.S. comp that while within guidance, tells us other players continue to steal market share. At a time of increased wallet strain on Wal-Mart's core low-income consumer, we should be seeing share gain (like 2008) not share loss.
2. Gross margin shed 30 bps year over year; we think due to markdowns, structural China inflation, and price increases from vendors (such as General Mills, Kellogg, Campbell Soup, and Kimberly Clark). The rate missed consensus by 51 bps.
3. No change to FY12 EPS guidance even though 1Q12 beat, perhaps on a cautious second half outlook (so where is the confidence in the U.S. as comp comparisons are very easy going forward).
4. No mention of the UK on the press release as a solid contributor to international performance, highlighting the rough market conditions.
5. How good is the quality of the EPS beat? Wal-Mart reduced the average diluted share count by 7.1% year over year.
6. Inventory growth was 2x sales growth.
Home Depot Nails It
The fear in the marketplace was palpable regarding the health, or lack thereof, of the 1Q11 report card from Home Depot (HD) as Lowe's (LOW) essentially laid an egg. Similar to what happened in 2010, Home Depot began 2011 by outperforming its smaller competitor in key operating metrics and delivering an overall superior earnings score sheet to shareholders, relatively speaking. I continue to be under the impression that Home Depot's consistent television message of low-price leadership and a friendlier shopping experience is leading to market share gain, despite Lowe's assertions yesterday that it scooped up modest share in the first quarter (maybe from those remaining independent hardware stores). Additionally, the company's strong entrenched position in the commercial building market must not be discounted as Lowe's continues to find its footing in the space.
In the tale of the tape, Home Depot won in 1Q11:
* Home Depot -0.6% comparable store sale decrease; Lowe's -3.3%. Home Depot has surpassed Lowe's for six straight quarters in terms of comps.
* Home Depot $0.01 EPS beat and $0.04 p/s FY11 guidance raise; Lowe's $0.02 EPS miss and FY11 warning.
* Gross margin expansion about even for both companies.
* Home Depot -1.9% transactions, +1.5% average ticket; Lowe's -3.4% transactions and flat average ticket (considering the unseasonable April weather, it's clear that Home Depot was comping at a very strong level in the first part of the quarter, hinting at a nice bounce as delayed projects come on line in 2Q11).
* Combined, Home Depot and Lowe's spent $2.3 billion to repurchase their shares in 1Q11.
* Home Depot inventory +1.87% year over year; Lowe's inventory -2.4% year over year.
Looking At Crude
By: Conley Turner, Research Analyst
Crude oil futures are lower as investors mull the impact of a slowing U.S. economy on the demand for crude. Benchmark crude for June delivery was trading at $96.99 on the New York Mercantile Exchange after settling at $97.37 on Monday. Brent crude was down $0.35 to
$110.49 a barrel on the ICE Futures exchange in London.
Comments made by Atlanta's Federal Reserve President, Dennis Lockhart did not inspire confidence either when he stated that it was too early for the central bank to exit from stimulus. Next month, the Fed is expected to terminate its program of purchasing treasury bonds to boost money supply along with asset prices. The program which is also known as quantitative easing has been an important factor in the declining value of the dollar.
Housing Starts
By: David Urani, Research Analyst
Housing starts for April were down 10.1% (seasonally adjusted) to 523,000 units, down from 585,000 in March, and falling well short of the 570,000 consensus. What makes the result even more interesting is that the March data was revised much higher, to 585,000 from 549,000. That means that the consensus was actually looking for a 3.8% month to month gain. With the spring selling season underway, we were hoping that a decent rate of sales would materialize for new homes, but the disappointment just continues. That being said, it may be a somewhat different story for existing homes, as foreclosure discounts make up a large part of the market. For us, the poor housing starts appear to be a combination of weak housing demand and a bias towards existing homes, which generally present better value. Now we're beginning to worry that new home sales will simply stagnate for the rest of the year, as home construction is supposed to be kicking into gear this time of year.
HP Brings Concerns to Investors
By: Carlos Guillen, Research Analyst
Hewlett Packard has come a day early in delivering its financial results for the first quarter of 2011, as a result of a memo that leaked before the actual earnings release. Perhaps causing some concern for the company is that CEO Leo Apotheker warned of "another tough quarter," which underscores the urgent concerns about the company's growth strategy and the challenges facing its new leader.
To put some perspective on HPQ's April's quarterly results and outlook, the company reported earnings per share of $1.24 on revenue of $31.63 billion versus the Street's consensus estimate of $1.21 in earnings per share and $31.53 billion in revenue. So, the problem for investors was not that the company underperformed this past quarter, as it beat by three cents on earnings and revenue was in line; the problem was that the outlook for the current quarter that we are in was below expectations.
HP said that it expects earnings per share of $1.08 during this quarter ending in July, which was much lower than the Street's consensus calling for earnings per share of $1.24. On the top line, HP expects revenue of $31.1 billion to $31.3 billion, under that Street's expectation of $31.8 billion. Perhaps even more concerning was that earnings guidance for the full year was lowered; HP now sees earnings of at least $5.00 per share, lower than the prior guidance of $5.24 to $5.28 per share and lower than the Street's consensus of $5.24 per share. According to management, this lowered guidance is the result of near term effects from the Japanese earthquake, continued softness in the consumer PC market, and reduced operating profit expectations for Services.
Clearly the problem for HP is its continued reliance on the consumer PC market, where competition is fierce. Apotheker is stepping up the company's emphasis on higher-margin businesses, including servers, storage computers and software, and lessening its dependence on PCs, but this has just begun and needs more time to fully develop. While the July quarter will be tough, the company's cost cutting effort and continued migration to higher margin markets will surely pay off in the longer term. Investors are surely to be disappointed with the less optimistic guidance, but they may not be looking at longer term growth potential for the HP. The July quarter will also be a tough quarter for many players in the space, not just limited to HPQ.
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