The Weekend Edition # 53

Are the bears back?; Housing Data; What did the Big Box Retailers Say?

August 21, 2022

Welcome to another issue of the Weekend Edition. 

Thank you to all who’ve read and subscribed to the newsletter this week!

Here’s what we cover:

  • Market Recap - Are the bears back?

  • Macro - Housing Data

  • Earnings Results - What did the Big Box Retailers say?

  • The Week Ahead - Economic & Earnings Calendar

  • Closing Thoughts

Let’s dive in ⬇️

Market Recap - Aug 15- 19, 2022

Another week of data and excitement in the stock market. Last week, we covered how there were people covering shorts and carrying out short squeezes in the markets, which was driving the market higher. Well, there was a lot of drama surrounding that this week as well as Bath, Bath and Beyond kept getting squeezed, peaking at 400% increase on Aug 17, from its price of $5.77, since Aug 1. There’s been a lot of controversy surrounding the squeeze but suffice to say that a company that is looking at bankruptcy shouldn’t have experienced this.

We also had housing data and retail data, which cause a small pull back in the market but not enough. The FOMC minutes were somehow confusing as well to people as many found them dovish and indicative of a Fed Pivot. Here’s my article on the Fed Minutes from earlier in the week, ICYMI - Thoughts on the Fed Minutes.

We did experience a brief pull back as European indices start to roll over with the news of UK’s inflation coming in at 10.1%, on 17 Aug and finally, we saw a larger pullback on Friday with OpEx.

While market breadth indicators have deteriorated in the last few trading days, it remains to be seen if get continuation next week.

We have the Jackson Hole Symposium where Fed Chair Powell speaks about the economy and we also have a few important earnings.

Macro of the Week

We got a bunch of housing data this week and all signs point downward. It would seem that the housing market is gradually retreating - something that’s required for inflation to decline.

We’re seeing a meaningful rollover in the housing market with builders pausing on construction and moving more towards home remodeling projects, one reason Home Depot still made out relatively well on earnings last week.

The NAHB Housing Index also showed a remarkable downward decline and we are now well below the average over a 5-year period. The only time the index has been lower was during the Covid decline.

NAHB Housing Market Index is a weighted average of three separate component indices: Present Single-Family Sales, Single-Family Sales for the Next Six Months, and Traffic of Prospective Buyers.

Earnings of the Week

Plenty of interesting earnings this past week from the major home improvement to big box retailers and few more retail names in between.

Let’s see what some of them had to say:

Walmart  

As we move through Q2, food inflation continued to tick up and we continued to see a heavier mix of sales in food and consumables in many of our markets and that put pressure on margins overall. Food comps in the U.S. were up mid-teens for the quarter, with units in food slightly negative and about flat exiting the quarter even with double-digit inflation.

Another weight on margins has been the number of markdowns we have taken. Starting back in March, we knew we needed to act quickly and aggressively in some categories and we have.

TJX Companies  

So, we’ve been struggling in our home area, as other retailers have, and you can see with the HomeGoods sales.

However, they have done, as has Marmaxx specifically, both have gone in and kept their inventories very clean and taken aggressive markdowns to ensure that we go into the back half with no liabilities and mix so that we can deliver as much fresh excitement based on what’s working and chase the hotter trends and vendors.

Lowe’s  

And some of you have asked whether we're seeing consumers trade down in their purchase activity. At this point, we are not seeing indications of material trade down. If anything, we're seeing the opposite with continued strong demand for our new and innovative products at higher price points.

Deere & co  

Overhead spend was also higher for the period as persistent supply challenges continued to cause production inefficiencies. Despite these challenges, factories were able to achieve higher rates of production and made progress on reducing the number of partially completed machines in inventory…

Despite the low trend crop yields due to inclement weather, customers are very profitable this year, benefiting from high commodity prices. 

The Week Ahead

Economic Calendar - Jackson Hole and PCE Data next week

Earnings - A few more retail earnings and a few major tech earnings

Closing Thoughts

Time really does seem to be rushing by this year. I can’t believe it’s already the last week of August and we have Jackson Hole next week. 

The market seems to have softened on Friday. I don’t know what Jackson Hole brings but, inflation will perhaps be an overarching theme. 

For some reason, the Jackson Hole speeches never seem to go as planned and there’s usually an element of surprise from the Fed Chair and markets react. We’ll just have to see what this time brings. 

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 no affiliation with any of the companies that are mentioned.

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