The Weekend Edition #5

FOMC Minutes, Retail Spending, Housing Starts, Retailers' Earnings, the "Verses" & AI

August 21, 2021

Welcome to the fifth issue of the Weekend Edition. 

Grab a cup of coffee ☕️, and relax while we take a quick look at what happened in the markets this week. 

We had a tough and busy week in the markets and there’s a lot to cover:

  • Market Recap - a look at the major indices, and the FOMC minutes

  • Charts of the Week- Retail Spending & Housing Starts

  • Earnings of Week - What the Retailers have to Say about Spending and Housing

  • Around the Market - Omniverse, Metaverse and Robots

  • The Week Ahead

  • Closing Thoughts

Let’s dive in ⬇️

Market Recap - 16 Aug 2021 - 20 Aug 2021 📉

Markets declined over the past week lead by the Dow, amid rising fears of the delta variant and the FOMC’s minutes that discussed the timing and pace of asset purchases. The 10Y yield also declined to 1.26% as the week closed, leading to a small uptick in the Nasdaq on Friday.

Oil had the longest losing streak since 2019, with WTI Crude falling over 9.9% over the last five days. Given the rising concerns over the delta variant, countries have gone into lockdown and the demand pressures continue. If this continues, OPEC+ may have to reconsider their decisions to increase production levels over the next few months. 

While oil and most other commodities were on a downturn, Gold did well gaining slightly over the last week. It would seem that people still consider Gold to be a safe haven given the uncertainty in the market and the rise of inflation. Even Palantir ($PLTR) decided to buy $50M worth of gold, as of the Jun 2021 filing, stating they wanted to be prepared in case of a black swan event.

While no confirmed decisions on the timing or pace of tapering asset purchases were made, the FOMC minutes released on Wednesday show quite a lengthy discussion on the subject. Here’s a summary from the FOMC minutes:

  • Asset Purchases: The Committee has two goals - maximize full employment and price stability. While they agreed that the first is close to being satisfied, the current level of price stability has satisfied the “significant further progress” criteria. This means that if the economy behaves broadly as they anticipate, “they judged that it could be appropriate to start reducing the pace of asset purchases” by the end of the year. This language is far more direct than any we have seen before. They also discussed that both MBS’ and Treasury Securities could be tapered at the same pace.

  • Fed Funds Rate: They also agreed to “clearly reaffirm the absence of any mechanical link between the timing of tapering and that of an eventual increase in the target range for the federal funds rate”, meaning they may still stick to their schedule of increasing the fed funds rate by the end of 2022 or even in 2023.

How this matters: The Fed’s purchase of assets (Mortgage-Backed Securities and Treasury Securities) is a way of increasing the liquidity in the economy, which acts like a stimulus. If the Fed holds more assets, this means that the private sector holds fewer assets. This causes a downward pressure on long-term interest rates and better financial conditions for the economy. So if the Fed starts to reduce the purchases, long-term interest rates will start to rise. This will not only make borrowing more expensive, it will mean that prices will increase in the economy so consumers will spend less. This will put pressure on stock valuations, which have an inverse relationship with rates.

Charts of the Week

Retail Sales - Released Tuesday 17 Aug 2021

Total Retail Sales fell 1.1% compared to the prior month’s increase of 0.7%. Ex-autos Retail Sales fell 0.4% compared to the prior month’s increase of 1.6%.

What this means: This suggests a slowdown in spending. On the one hand, you have lower purchases on travel and entertainment due to fears of the delta variant as Southwest reported the previous week. On the other hand, you have consumers battling higher prices on every day spending. Sticker shock seems real. We saw this reflected in the Consumer Sentiment report, the previous week. We also take a look below at what the retailers said, when they reported earnings this week.

Housing Starts - Released Wednesday, 18 Aug 2021

Housing Starts fell 7.0%, MoM, in July, to an adjusted annual rate of 1.534m; down from June's rate of 1.65m and missed expectations of 1.6m. YoY however, starts are up 2.5% over July 2020. Building permits were also up by 2.5% to 1.635m beating out expectations of 1.61m.

What this means: The drop in housing starts signals a slowdown in construction, possibly due to supply and labor shortages. The delta variant is also a factor. However, a positive permits trend signals that the situation may be temporary. We’ll see what the home improvement stores have to say below.

Earnings Week - Retailers

It was a fantastic earnings quarter for the retailers across the board, with every company beating EPS and revenue estimates. As the economy re-opened, almost all the retailers saw a stark improvement in same-store sales and in-person shopping. On the supply side cost pressures remained from rising commodity prices, wage inflation, freight costs and shipping delays. But, with the strong level of demand and focus on omnichannel, the retailers came out swinging.

Home Improvement Stores:

Both Home Depot ($HD) and Lowe’s ($LOW) reported this week and had a similar view of the market. Both retailers confirmed that as the economy opens, the DIY’s are spending less time shopping for remodeling and turning over the jobs to the Pros, who can now return to work. In fact, individual traffic had decreased remarkably on the weekends, as people have decided “hardware shopping” is no longer the definition of a fun weekend. While this helped HD increase same-store sales 4.5% YoY, Lowe’s took a bit of a hit declining 1.6%, as Lowe’s caters more to individuals.

Both confirmed though that sticker shock had not prevented people from trading up their appliances. What did however, cause them trouble was the rising commodity prices, namely lumber and the delays in shipping that caused stocking issues.

On the Housing Market:

Lowe’s: “The outlook for the home improvement industry remains very positive. Residential investment is expected to remain high due to historically low mortgage rates while home prices continue to appreciate. … there is more housing demand than supply, resulting in home prices continuing to rise.”

Home Depot: “we believe that home price appreciation is a fundamental support of home improvement activity and demand. As your home becomes more valuable, you are more likely to spend more on it. We are at a point now where the housing stock of the United States is over 20% more valuable than it was 2 years ago. And so as we look forward, not only have we seen that home price appreciation, but the homeowner balance sheet is incredibly healthy. The state of mortgage finance is incredibly healthy.” 

Retailers

The Big Box retailers were very careful with any discussion on inflation, driving home the message that despite rising costs, they are focused on providing value for money to the consumer. Given their bargaining power, they’ve managed to increase lead times in ordering and have chartered vessels, specifically for their deliveries. While they both mentioned that in-stock levels were lower than what they’d like, they’ve managed to maintain sufficient inventory to avoid stock-outs.

The retail chains however, had a more challenging experience with rising wage inflation and supply chain issues. Nevertheless, growth was led primarily by apparel, followed by makeup, as people get ready for in-person social events, increasing same-store sales.

All the retailers claim that the quarter beginning July has started strong with back-to-school shopping providing a boost.

Macy’s ($M) had the biggest surprise, beating and raising expectations. The Company reported a much stronger cash position leading to a reinstatement of their quarterly dividend and a $500m share repurchase program. The stock got a boost and this may be one of those beautiful turnaround stories to come.

Amazon’s Surprise Announcement

While every retailer confirmed much of their success to the improvement in their online shopping channel, in a surprising turn of events, Amazon ($AMZN) announced that they were going to invest in brick-and-mortar stores. They are looking at stores of up to 30,000 sq.ft., with the first locations slated for California and Ohio.

Who said brick-and-mortar is dead?

Around the Market

NVIDIA’s Omniverse

Not surprisingly, $NVDA beat 2Q expectations on EPS at $1.04 vs. est. $1.02 and Revenue at $6.51B vs. est. $6.33B, and raised 3Q revenue expectations to $6.8B (+/-5%).

The real news though was the Omniverse. The Company said that more than 50,000 creators have downloaded Ominverse since the open beta. According to their release: "We are thrilled to have launched NVIDIA Omniverse, a simulation platform nearly five years in the making that runs physically realistic virtual worlds and connects to other digital platforms. We imagine engineers, designers and even autonomous machines connecting to Omniverse to create digital twins and industrial metaverses"

FB’s Horizon

The word of the day three weeks ago was the “Metaverse”, when our boy genius announced it on the $FB earnings call. Ever since then, there’s been a host of discussions about it. But, hey guess what? Zuck went ahead and gave us a look at what the Horizon Workplace looks like. So now, we don’t even have change out of our pj’s!

AI Day - “Tesla is arguably the biggest robotics company” - Elon Musk

Held on Thursday, 19 Aug 2021, $TSLA made a brilliant attempt to explain how they’re making self-driving a reality. While much of the detailed tech stuff went over my head, I did get a fairly good idea of how they’re using AI to make it safer. They also spoke about DOJO, their project to create a powerful training computer to achieve this.

But what’s Elon Musk without a bit of a show… introducing the Tesla Bot. A basic robot that will be able to pick up your groceries. Elon claims “physical labor will become a choice” and luckily, he also confirms that we’d able to outrun and overpower it… just in case you were having flashbacks of Will Smith in iRobot. 😆

The Week Ahead

  • The Jackson Hole Conference - 26 Aug to 28 Aug - Fed Chief Powell will speak on Friday 27 Aug at 10am ET but, virtually this time because of Delta Variant.

  • Earnings: We’re not done with earnings yet and next Wednesday and Thursday will be busy. Snowflake ($SNOW) who reports on Wednesday, has already taken a hit on their stock price which is attributed to a Cleveland Research report that said the company's signings growth slowed from Q1 while consumption growth was likely similar, at best, to Q1 levels. Cleveland also said that the company's partners were seeing sales cycles elongate on increased competition from the hyperscalers, particularly Google's BigQuery, according to Bloomberg. We’ll know more once the results come out.

Closing Thoughts

The market recovered well on Friday closing in the green but, fears of the delta variant may be causing more pressure than expected.

The Fed will only take the decision to taper Asset Purchases if they think that the economy has become strong enough on its own, so that rising prices will not spin out of control and unemployment will not rise. They confirmed that they would warn ahead of time of any decisions. Hence, our focus on Jackson Hole.

With strong job numbers that we last saw, the Fed’s discussion on possibly slowing down asset purchases by the end of the year makes sense. However, the charts we saw above on slowing retail purchases, slowing housing starts and the drop in oil, all point to demand pressures (and lingering supply pressures) as a result of the delta variant. Even the Jackson Hole meeting will be held virtually. All this may seriously make the Fed reconsider their decision to taper. Virtual or not, Chief Powell’s speech will be an important one to watch and the markets may just remain choppy until then.

Here’s wishing you a happy weekend and safe investing. 

Sincerely yours,

Ayesha Tariq, CFA

There’s always a story behind the numbers

None of the above is Investment Advice. I may or may not have positions in any of the stocks mentioned. I have long positions in $LOW, $HD, $PLTR, $FB, $NVDA as of the date of publication of this newsletter. I have no affiliation with any of the companies that are mentioned.

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