A Pleasant Shade of Gray

by Jason Norris, CFA Executive Vice President of Research

Headline sales numbers from Black Friday looked disappointing with revenues falling 11 percent in 2014, which follows a negative year in 2013 as well. However, when we dig into the data, we see that sales have spread out over the entire week. Many stores have been starting their promotions earlier in the Thanksgiving week, meaning Black Friday is not the seminal event it once was. Coupled with an increasing amount of shoppers going online, the post-holiday shopathon is not the signal to the markets it once was.

Data from the entire weekend looked fine with sales rising approximately four percent, with a 15 percent clip coming from online sales. In forecasting the entire holiday season, industry analysts still expect low to mid-single digit growth. In light of gasoline prices down 35 percent from last year, we are comfortable with that growth forecast. In fact, this led us to increase our allocation to the consumer discretionary sector recently.

Quantitative Speaking

With the Fed wrapping up its quantitative easing last month, the European Central Bank has upped their rhetoric. This week, ECB president Mario Drahgi was more adamant that the ECB will be in the markets buying bonds. This put a small bid on the Euro; however, we are still waiting for the ECB to actually make meaningful purchases. Since 2012 when Drahgi stated the bank would do "whatever it takes" to prop up the Euro economy, there has been a lot of speaking, with little actual easing.

The economic data points coming out of Europe have been neutral at best. While the old adage of "don't fight the Fed" may be appropriate for the ECB and European equities, we would rather focus on large cap U.S. stocks due to a strong economy, falling commodity prices and low interest rates. One potential headwind for multinationals is going to be the strength of the U.S. dollar. The dollar has rallied 10 percent the past few months and this will start effecting overseas results this quarter. Due to this, recent portfolio additions have focused on the domestic economy, rather than the global economy.

Our Takeaways for the Week: 

• Falling gas prices and an improving U.S. economy keeps us bullish on U.S. stocks
• Continued dollar strengthening will benefit U.S. stocks and bonds, while pressuring commodity prices, thus keeping inflation low

Disclosures

Easy Money

by Ralph Cole, CFA Executive Vice President of Research

The global economic expansion continues to run at very different speeds around the world. However, the common thread among most all developed economies has been easy money. Today, China joined the party by lowering interest rates for the first time since 2012. The reasons for lower rates has been stubbornly slow growth, and as long as inflation remains low, central banks can feel confident in their choice to stimulate their economies.

Markets were also buoyed this week by dovish comments out of the European Central Bank. With most European economies mired in little to no growth, and the ECB has embarked on its own version of quantitative easing (QE). Mario Draghi hinted in a speech yesterday that their asset-buying program could expand if necessary. The lack of economic growth in Europe can at least be partially explained by Draghi’s habit of speaking about, rather than actually enacting, central bank policy. In Texas, they would call this “all hat and no cattle”.

Thrift Shop

This week just about wrapped up earnings season for retail companies. Earnings were basically strong across the board for retailers from Dollar Tree and Target to Foot Locker and Best Buy. We believe retailers and consumers are starting to feel the benefits of lower prices at the gas pump. Lower gas prices often coincide with higher consumer confidence numbers, which in turn leads to increased consumer spending.

What makes the retail industry so interesting is the plethora of stores from which shoppers have to choose. I don’t think any of us would argue that we aren’t over-retailed in the U.S. This abundance is one reason we don’t see much inflation. Despite a zero percent interest rate policy and a massive expansion of the Fed’s balance sheet, inflation is not yet finding its way onto store shelves. Competition for the consumer’s discretionary dollar remains fierce. Case in point: the phenomenon of Black Friday sales moving earlier into our Thanksgiving holiday week.

Our Takeaways from the Week

• Global markets continue to respond positively to easy money policies around the world
• Lower gas prices should lead to positive sales for retailers this Holiday season
• Have a Happy Thanksgiving and travel safely

Disclosures

Black Friday Magic

by Jason Norris, CFA Senior Vice President of Research

Good Mourning Black Friday, Welcome Cyber Monday

Black Friday shopping numbers were not much to write home about, but it is uncertain if it is the state of the consumer or the “expansion” of Thanksgiving weekend specials to the day of turkey day or even before. Thirty-three percent of “Black Friday” shopping occurred on Thursday, up from 13 percent in 2011. Over the entire weekend, traffic remained healthy; however, sales were a bit below expectations (up 2.3 percent) and would have been negative if not for 15 percent growth in online sales over the weekend. The weakness was most notable in the Northeast.

The other phenomenon is the growth of Cyber Monday. Online sales that day (the Monday following Thanksgiving weekend) were up over 19 percent and are projected to be up 15 percent this holiday season. Online sales will account for 14 percent of the $600 billion expected to be spent this season. While Amazon.com continues to be the main beneficiary of this trend, valuation metrics can’t get us excited about the stock, but as consumers we continue to benefit.

Learning to Fly

Speaking of Amazon, its CEO Jeff Bezos was interviewed on 60 Minutes and pulled off a great publicity stunt to keep the e-commerce retailer in the news all week. If you haven’t already heard, Mr. Bezos announced that Amazon was looking at using unmanned drones to deliver packages. While Amazon has a reputation of being a visionary and willing to invest in growth, the near-term applications of this announcement seem more or less PR rather than delivery. We just hope it doesn’t get to the point where our kids can’t enjoy the snow during the holidays because they will have to be avoiding all the Amazon package deliveries from the sky.

Detroit Rock City

Looks like we are witnessing a slow motion car accident with the approval of a federal bankruptcy filing by the city of Detroit. Deidra Krys-Rusoff, Ferguson Wellman’s municipal bond analyst and portfolio manager, believes that with U.S. Bankruptcy Judge Steven Rhodes ruling that Detroit is eligible to file for bankruptcy protection it may permit them to emerge from $18 billion of debt. This ruling grants the city the power to establish a financial plan which will allow the city to provide public services while meeting adjusted debt obligations. Judge Rhodes also ruled that pensions may be adjusted under federal bankruptcy, despite the fact that Michigan’s constitution does not allow for cuts to established pension obligations. This ruling may permit the trimming of pensions and retirement benefits, taking away the “protected” status usually afforded to the plans and placing them on an equal platform to other creditors (such as bondholders).  We expect unions to fully challenge this decision, and the local union has already filed an appeal.

We believe that this event is isolated and should not have an overarching effect on the muni market. Any way you look at it though, this may end the same way as the 1976 classic song at some parties.

Stagefright

This week was the 17^th anniversary of FED Chairman Greenspan’s “irrational exuberance” speech, and investors are anxious for what to expect in 2014 after a 25 percent+ move in equities this year. While this week we have seen some weakness in stocks as rates have risen, we still don’t foresee a major sell off. Putting history in context, in the bull market run from 1990 through 1996, equities DID NOT have a 10 percent correction, and we didn’t peak until March 2000. We are not saying that history will repeat itself, but with the U.S. economy improving and inflation remaining tepid, we would be buyers of equities on any major pullback.

Our Takeaways for the Week:

• Even though stocks have run, we are still constructive on equities
• Any weakness in the municipal bond market should be seen as a buying opportunity for quality muni bonds.

 Disclosures

Giving Thanks

by Shawn Narancich, CFA Senior Vice President of Research

Early Christmas Gifts

Another week, another record close. With both the S&P 500 Index and Dow Industrials breaking into new record territory, equity investors have much to be thankful for as they celebrated the Thanksgiving holiday and began to ponder full year returns that are shaping up to be the best in fifteen years. Trading volumes slowed to a crawl in typical holiday week fashion, with fewer investors around to digest a relatively light slate of news flow.

A Quiet Time

Those manning their desks were left to digest new housing data that showed a drop-off in October pending home sales juxtaposed against another strong Case-Schiller report, which showed house prices nationally up over 13 percent in September. For us, the tie-breaker was new residential housing permits for October, which rose 6.6 percent sequentially, to annualized levels exceeding one million units. While new apartment complexes drove the gains, permitting for single-family homes also rose, an encouraging development given the political upheaval that occurred last month. Housing has been a key driver of the U.S. expansion to date, and remains vital to our expectations for economic growth next year. In turn, interest rates on the 10-year Treasury are a key input to setting mortgage rates. As such, the Fed is paying close attention to them as it considers its next move. Tapering QE too soon or too quickly could spook bond investors, causing prices to fall and mortgage rates to rise. With housing data more mixed recently, this is the type of outcome the Fed is attempting to avoid, and a key reason why we think policy makers will err on the dovish side.

Black Friday (Thursday?)

Whether Santa Claus will deliver a Christmas bounty or a lump of coal to retailers is yet to be seen, but judging by the overflowing crowds seen at key shopping venues like Wal-Mart and Best Buy, shoppers’ enthusiasm for a deal is as strong as ever, incenting some to venture out as early as Thanksgiving Day. Estimates for holiday sales growth seem to be settling out around the 3-4 percent level, but the question as always for retailing investors is the price at which those sales transact. In addition to the level of sales growth, investors will attempt to discern the profitability of those sales, and the underlying gross margin data does not typically arrive until retailers report their financial results in late February. As indicated in last week’s web log, we believe the best success will be had by those focused on either the high-end or low-end, with general merchandisers like Kohl’s and Target caught betwixt and between.

That said, we bid our readers happy shopping on this Black Friday, so named for the day’s typically heavy selling pace that can swing retailers from losses to profits for the year. Moreover, we wish our clients and friends a peaceful and most enjoyable holiday season!

Our Takeaways from the Week

• Amid low trading volumes, stocks scaled new heights in a holiday shortened week

• Retailers are in the spotlight as the Christmas selling season begins

Disclosures