 The Market Sum | Insight after the bell
By Caleb Silver, Editor in Chief Thursday's Headlines 1. Markets Slide as Chips Fall 2. Lumber Shipments Decline Amid Trade War 3. Peloton's Uphill IPO Challenge Markets Closed
 Markets Today
Despite a lot of other news coming out of Washington D.C. today, trade appears to still be top of mind for investors. The White House announced after the market close that trade talks with China will resume on Oct. 10. Perhaps they should've made that announcement earlier in the day, given the sell-off in chip stocks. As we've mentioned, chip stocks, or semiconductors, as they are called, are among the canaries in the coal mine for the trade war. They are an essential component in smartphones, servers, and computers, and they are at the center of the controversy surrounding intellectual property and privacy.
Today's controversy might be related to Chinese telecom giant Huawei.
Read more: Why Huawei is at the Center of the U.S. China Trade War
Bloomberg News reported earlier today that the U.S. is unlikely to extend a temporary waiver that will allow U.S. companies to sell supplies to Huawei. As you may remember, the U.S. Treasury Dept. blacklisted Huawei in May, alleging the Chinese company was involved in activities contrary to U.S. national security or foreign policy interests. In August, the Commerce Department added more than 40 additional Huawei's units to its economic blacklist, raising the total to more than 100 Huawei entities covered by the restrictions.
That was enough to put the shiver into Micron, the largest U.S. maker of semiconductors and a big supplier to Huawei.  Timber... Lumber Exports Keep Falling Electronics and corn get a lot of the attention in the trade war coverage, but lumber prices (hardwood and soft woods) have been falling hard since the spring of 2018.
The WSJ has an excellent feature on the decline in lumber and its impact on small businesses and lumber-based communities across the U.S.
The short version is that lumber prices, which were decimated in the financial crisis as home buying and construction slowed dramatically, staged a comeback thanks to China. U.S. producers saw a dramatic rise in prices as China's economy started to explode, pushing more Chinese consumers into the middle class, who started buying oak and cherry wood from U.S. mills. At the end of 2017, China imported 47% of all hardwood lumber and 76% of all hardwood logs from around the world.  Fast forward to May of 2018 when two things started to unravel. China's growth rate started to slow just as the trade war with the U.S. intensified. In early August of 2018, China placed retaliatory tariffs of up to 25% on imports of lumber and other U.S. wood products. That led to a 40% decline in U.S. exports of hardwood lumber to China, and a massive cut to lumber prices.  Lumber in the U.S. is a $35 billion industry that employs close to 90,000 people. Take a drive into the Pacific Northwest, and you'll see entire communities that have been built around the timber harvest. Those communities are struggling, and so are the public companies that are lumber based.
Weyerhauser (WY), is the largest publicly traded lumber company that both grows, harvests, and mills wood. Its shares are down nearly 15% in the past year. Lumber Liquidators (LL) is one of the largest lumber retailers. It has fallen 40% in the past year.  Peloton Loses Traction with IPO
Peloton was yet another hotly anticipated IPO of 2019. It had all the makings of a unicorn stock set to soar: a rabid following, a subscription model, and a certain panache among those who could afford the $2,245 home-exercise bicycles, the $4,295 treadmills, and the $39-a-month streaming video workouts.
That was before the IPO flops of Uber, Lyft, and the debacle known as WeWork. Investors have become very skeptical, very quickly.
According to Peloton's S-1 filing, the company recorded revenue of $223 million in the quarter that ended in June, up more than 100% from a year earlier. More than 70% of sales came from "connected fitness products," while most of the balance was from subscriptions. But, Peloton also posted a quarterly net loss of $47 million as costs rose due to research and development costs for new products and expanding facilities.
Losses are one thing, especially for a young company that has proven that it can attract and keep customers. Peloton has certainly proven that. But several critics have pointed out that Peloton's method of revenue recognition may be a troubling sign.
According to CBSMoneyWatch, about half of Peloton's exercise-equipment sales come through a financing arrangement that allows customers to buy its stationary bike for just $58 a month or its treadmill for $179 a month. The purchase requires no money down, and it carries a 0% interest rate for as long as 39 months for the bike and 24 months for the treadmill.
Peloton, according to its IPO documents, books these sales as full purchases from the moment the customer gets the equipment. That's not illegal or unusual. Many companies book revenue before they have been paid. But most of them will record an accounts receivable to identify cash that they are still waiting to collect. Peloton doesn't seem to be doing much of that: While its sales rose by $480 million in its last fiscal year, its accounts receivable rose by just $9 million.
I know a lot of people who love their Peloton and are happy to pay the subscription service. The company has tapped into our obsession with fitness, community, and convenience. It's a great product, but that doesn't mean it will be a great stock.
P.S. Of the 120 IPOs this year, 57 are negative from their offer price -- or almost 48%.
chart courtesy www.koyfin.com  Shares of Conagra Brands rose by almost 4% today, following the release of their Q1 results, which thus far showed strong net sales growth for the fiscal year. Whirlpool's stock price increased by nearly 3% after being upgraded from "Neutral" to "Overweight" by JPMorgan.  Shares of Carnival fell by over 8% today, after the company released its outlook for 2020, which revealed that bookings and prices are down for the first six months. Centene's stock price decreased by almost 5% amid WellCare, which is pending acquisition by Centene, agreeing to sell its Missouri and Nebraska Medicaid plans to Anthem.  Word of the Day Revenue recognition is a generally accepted accounting principle (GAAP) that identifies the specific conditions in which revenue is recognized and determines how to account for it. Typically, revenue is recognized when a critical event has occurred, and the dollar amount is easily measurable to the company.  (image courtesy: loc.gov)
Today in Regulatory History Sept. 26, 1914: The Federal Trade Commission is established to foster competition by preventing monopolies in business. On Sept. 26, 1914, President Woodrow Wilson signed the Federal Trade Commission Act into law. The FTC opened its doors on March 16, 1915. The FTC's mission is to protect consumers and promote competition.
(source: FTC.gov)
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Thursday, September 26, 2019
Uphill Climb
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