foxex: Back in Black

The Market Sum | Insight after the bell

By James Early

Wednesday's Headlines

1. U.S. Markets Back in Black

2. Target and Lowe's Deliver Good Earnings

3. Negative Interest Rates Scaring Everybody

4. Fed's July Meeting Minutes Surprise Nobody

Markets Closed

Dow
26,202.73 +0.93%

S&P
2,924.43 +0.82%

Nasdaq
8,020.21 +0.90%

VIX
15.8 -9.71%

Bitcoin
$10,163.33 -5.36%

US 10-Yr Yield
1.577 +1.025%

Markets Today

S&P up 0.82%, roughly erasing yesterday's loss
Dow up 0.93%

The market tends to have a mood, and when there's no obvious whole-market-affecting economic news, the market may extrapolate from what data points it has to divine one. Luckily, today, two big companies—Target ($53 billion in market capitalization (more colloquially, "market cap")) and Lowe's ($84 billion in market cap)—came out of the gate with strong results, and the market followed suit. Some headlines mention the Fed's meeting minutes release as a driver, but by the time the Fed released its relatively unsurprising July minutes at 2 p.m. Eastern time, the market momentum had been in swing for hours.

The idea of extrapolating from a few companies' earnings doesn't sound cerebral at first, but it's not crazy: Target and Lowe's are huge companies, and thus huge barometers of the U.S. consumer. And consumer spending makes up 68% of the U.S. economy.

An assist may have come from The White House's letting slip of possible payroll tax and capital gains tax cuts to stimulate the U.S. economy, as well as from President Trump's mention that the U.S. will "probably" make a deal with China. This market still seems eager for reasons to rise.

Target

Target stock was up more than 20%—that's not a typo—on a raft of good news. Same-store sales grew 3.4% (vs. 2.9% collectively expected by Wall Street analysts), digital sales grew 34%, and the company now expects to do $5.90–$6.20 per share in earnings for the year, instead of the $5.75–$6.05 it previously expected. Because equity investors ultimately own (at least theoretically) the earnings of a company, earnings are generally a bigger deal to stockholders than sales, but in this case, nobody had to take sides: Target excelled in both.

The backstory here is the continued evolution of retail. Target also mentioned that apparel sales rose 5%; there's a hidden meaning in that. Since that's faster growth than other apparel retailers are seeing (in fact, many delivered negative comparable-store sales), analysts say Target is likely getting that above-normal growth by taking business from mall-based retailers like J.C. Penney, Macy's, and even Kohl's (although Kohl's is not so much a mall-based retailer). Meanwhile, Target, Walmart, and TJ Maxx are flourishing.

Lowe's
Not to be outdone by rival Home Depot's 4.5% gain the other day, Lowe's, whose slightly-less-warehouse-y stores are designed to draw in more female customers, saw its shares jump more than 10% on better than expected results (which is somewhat axiomatic if a stock rises, because expected results are already baked into stock prices). But results were clearly better: adjusted per-share earnings of $2.15 (vs. $2.01 estimated), revenue of $20.99 million (vs. $20.94 estimated), and same-store sales growth of 2.3% (vs. 1.9% estimated). Those are all good "beats" in Wall Street parlance. Home Depot, you may recall from yesterday's Market Sum, beat on earnings but missed on sales, so Lowe's is the winner in the "better-than-expected" department this quarter.

To complement the blow-by-blow, a parallel narrative is that Lowe's CEO Marvin Ellison—brought in to resuscitate the company after years of wan results—is about a year into his job, and analysts are giddy that results are, indeed, less wan. Ellison, who is surely thankful he left J.C. Penney for this new gig (he was at Home Depot and Target prior to J.C. Penney), hasn't been tiptoeing around anything: He's closed underperforming stores, gutted the management team, ditched unprofitable divisions, inked a deal with the NFL, and fled (the company) from Mexico, among other turnaround-style exploits.

But while actual housecleaning delivers results fairly quickly, corporate housecleaning often doesn't. Now, a year in, we're finally seeing evidence that Ellison seems to know what he's doing. Oppenheimer analyst Brian Nagel, who gushed positive about the stock on CNBC, sees 84% upside. It's not our job to know if he's right or not. But it's plain to see that both the market and

analysts seem excited after these results.

Negative Interest Rates Scaring Everybody

Or at least scaring more people besides yours truly. Jim Bianco of Bianco research has been making the media rounds on this topic, among others, calling the prevalence of negative rates "cancerous" in an interview with Financial Sense. Bianco feels that the only reason negative rates in Japan and Europe haven't done more damage to the global economy is that investors can still find positive yields in the U.S. and U.K., and if negative yields show up here (and there) too, "it will do nothing short of destroy the financial system."

Yikes.

The German Bundesbank, which doesn't read Bianco's commentary, added to the now-$16 trillion in sovereign debt trading at negative yield by inviting investors to buy its own 30-year bond offering at slightly negative rates. Take the "30-year" part in with a breath; the German government is asking investors to commit to three decades of paying it for the privilege of loaning it money. Sound like a good deal to you? Me, neither. And, apparently, neither to investors, who only bought about half of the bonds the country hoped to sell.

Bianco's other pet peeve is negative corporate yields, so far mostly seen in Switzerland and Japan. Negative corporate yields, which rose from just $20 billion in January to cross the $1 trillion mark recently—blessedly just a sixteenth of negative sovereign yields, but gaining quickly—are particularly insidious, according to Bianco, because of the price sensitivity of the underlying bonds. He notes that a two-point rise in interest rates could destroy 50% of the Swiss bonds' values, for example.

Yes, a two-point rise in rates seems like a pipe dream these days, but it illustrates a directional concern: In the event of a strong economic recovery, owners of these gloomy bonds are in for a bloodbath. That means good economy = bad news in this case. In other words, good news = bad news. That's weird. And—just connecting the dots further—because these negative-rate bonds are being bought by big, systemically important institutions, central bankers now also have a new, potentially systematic, risk to worry about in the event of a recovery. This is the catch-22 of negative rates.

Image from Bianco Research, as cited by CNBC

Fed's Meeting Minutes Surprising Nobody

You can't handle the truth.

At least not without a three-week delay, says the Federal Open Market Committee. The FOMC finally released its July meeting minutes, although investors arguably could have handled the truth on this one. In keeping with Fed Chair Jerome Powell's much-critiqued words in July, the FOMC overall did not want to commit to a pre-set path of lowering rates. Powell and the Fed—the "only problem" with the U.S. economy per a tweet today from President Trump—eyed three things in deciding on a 0.25% cut they termed a "recalibration:"

A slowdown in business investment and manufacturing, likely related to the trade war.
General risk management, considering that global central banks have limited ability to stimulate at this point.
U.S. inflation is still slightly below the Fed's 2% target.

Some members wanted to double the cut to 50 basis points, while some wanted none at all.

Interestingly, in 1975, David Merrill, a then-student at Georgetown Law School, challenged the FOMC on its delayed disclosure policy, which the FOMC thought was essential to avoid markets overreacting to its words. The case went all the way to the U.S. Supreme Court, which referred it back to U.S. District Court, which this time sided with the FOMC. Ergo, we still have the three-week delay. Incidentally, fully edited transcripts of FOMC meetings are kept secret for five years after the meetings. Then they're released. And the unedited transcripts? They're destroyed.

Programming note: The Market Sum is will be guest written this week (until August 28th) while Caleb is out for a little summer fun with his family.

More News:

Lowe's Stock Breaks Out as Retail Outperforms

Get Ready for a Volatile Fourth Quarter

3 Charts That Show Consumer Discretionary Stocks Are Set to Move

chart courtesy www.koyfin.com

Despite several department stores suffering from costly tariffs and Amazon's market domination, Target managed to beat its Q2 earnings estimates by a significant amount, leading to a more than 20% stock price boost. Although fellow retailer Lowe's wasn't quite as successful, its shares still rose by over 10% today due to its second-quarter earnings and revenue also managing to beat expectations.

Aflac's stock price decreased by almost 6% after it was reported that one of its partners, Japan Post, sold over 100,000 insurance policies utilizing improper practices. Shares of GE have fallen yet again, this time by nearly 3%, following Fitch Ratings issuing an insurance industry report today that mirrored concerns previously raised by Harry Markopolos.

Europe managed to repeat its flawless victory from yesterday, though this time it was Brazil and South Africa that rose the highest. However, far few countries fell today, with India and Saudi Arabia being the only ones to really lose any substantial ground.

Word of the Day:

Zero-Bound Interest Rate

Zero-bound interest rate is a reference to the lower limit of 0% for short-term interest rates beyond which monetary policy is not believed to be effective in stimulating economic growth.

Zero bound interest rate assumptions have been upended in recent years. In monetary policy, reference to a zero bound on interest rates means that the central bank can no longer reduce the interest rate to encourage economic growth. As the interest rate approached the zero bound, the effectiveness of monetary policy as a tool was assumed to be reduced. The existence of this zero bound acted as a constraint on central bankers trying to stimulate the economy.

Until recently it was assumed that central banks, in setting overnight lending rates, did not have the ability to push the nominal interest rate beyond this limit of 0%, into negative territory.

Credits: Bettmann/Getty Images

Today in Statehood History

Aug. 21, 1959:

Hawaii, known on the mainland for luaus, surfing, and Dog the Bounty Hunter, becomes the 50th state with the pen stroke of President Dwight Eisenhower. Although Hawaii, with just 1.4 million people, is 41st among U.S. states by population, it's 39th by GDP. Tourism is the single largest contributor to the state's economy, making up 21% of that GDP figure.