Author Archive

• The Retail Implosion
  Eddy Elfenbein, May 18th, 2022 at 12:07 pm

  Yesterday it was Walmart’s turn. Today it’s Target. Shares of Target are down over 24% today. The company reported earnings of $2.19 per share which was well below estimates of $3.06 per share.

  Stocks like Costco and Amazon have been falling for several months but have been getting worse lately. Costco is off 11% today. Walmart is down again today. Most anything in retail is having a hard time, especially the stores that cater to lower-income shoppers.

  BJ’s Wholesale Club is down 16% today. Both Dollar Tree and Dollar General are down over 10% today. Best Buy, Kohl’s and Five Below are at 52-week lows.

  This is a mess and it’s due to inflation. When prices go up, that alters consumers’ behavior. They cut back in the higher-priced areas and put off purchases for another time.

  The Elon Musk-Twitter deal is in serious jeopardy. Musk appears to be balking at the deal. He’s also raised the issue of bot accounts but that doesn’t seem to be something that could have just occurred to Musk in the last few days. That’s a long-standing issue at Twitter.

  Twitter has said that it will hold Musk to his offer of $54.20 per share. The stock is now around $37 per share.

  Last week, Musk said that the deal is “temporarily on hold.” He said he wanted more info on Twitter’s claims that less than 5% of its accounts are fake. It looks like Musk is getting cold feet and he’s using the bot issue as his escape clause.

• Morning News: May 18, 2022
  Eddy Elfenbein, May 18th, 2022 at 7:00 am

  ECB Tells Banks to Buckle Up as Ukraine War Hits Economy

  UK Inflation at a 40-Year High Engulfs Johnson and BOE in Crisis

  Japan’s Economy Shrank 1 Percent as Consumers Fled Covid

  Poor Countries Face a Mounting Catastrophe Fueled by Inflation and Debt

  Omens of Decline for Russia’s Once World-Leading Energy Industry

  How Russian Businesses Are Skirting Sanctions

  Yellen’s Grand Global Corporate Tax Plan Risks Flop in Congress

  IRS, Reversing Course, Tees Up Potential Tax Fight With Multinational Companies

  Powell Says Fed Has Resolve to Bring U.S. Inflation Down

  How a Trash-Talking Crypto Bro Caused a $40 Billion Crash

  As Musk Tweets, Advisers Plug Away to Keep Twitter Deal on Track

  Used Cars Become an Expensive Problem for Online Dealers Like Carvana

  JPMorgan Shareholders Reject Special $52.6 Million Payout to Jamie Dimon

  Cerebral Board Members Agree to Replace CEO Amid Federal Probe Into Prescription Practices

  The Long, Slow Death of Lehman Brothers Is Almost Complete

  Allianz Fund Managers’ Paydays Could Be Followed by Prison

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• CWS Market Review – May 17, 2022
  Eddy Elfenbein, May 17th, 2022 at 7:29 pm

  (This is the free version of CWS Market Review. If you like what you see, then please sign up for the premium newsletter for $20 per month or $200 for the whole year. If you sign up today, you can see our two reports, “Your Handy Guide to Stock Orders” and “How Not to Get Screwed on Your Mortgage.”)

  Inflation Punishes Walmart

  This week is when many retailers report their earnings. Retail companies often prefer a fiscal year that ends at the end of January. That way, the all-important holiday shopping season (November, December and January) is contained in just one quarter. That leads many retailers to have a Q1 that ends at the end of April which means we get their latest earnings reports about now.

  As far as retailers go, they don’t get much bigger than Walmart (WMT). Walmart is so big that its earnings report is probably closer to the government’s report on consumer spending. To be honest, it’s probably a better gauge of how many middle-class and lower-middle-class folks are doing.

  This morning, Walmart reported earnings of $1.30 per share. That badly missed Wall Street’s forecast of $1.48 per share. That’s an unusually large miss. It seems that inflation is having an impact on shopping habits.

  Walmart actually topped Wall Street’s revenue forecast. For February, March and April, Walmart registered sales of $141.57 billion compared with estimates of $138.94 billion. E-commerce sales rose by just 1%. To give you an example of Walmart’s size, the company averages sales of $20,000 every second of every hour of every day.

  Walmart is apparently having a shortage of store managers even though the position can pay more than $200,000 per year.

  One bright spot is that Walmart raised its full-year sales forecast by a tad. Before, Walmart had been expecting an increase of 3% in constant currency. They bumped that up to 4%.

  Walmart also said it expects earnings-per-share to fall by 1%. That’s down from the earlier projection of an increase in the mid-single digits.

  Some people think that consumers are benefiting from Walmart’s higher sales and lower earnings, but that’s not what’s happening. Instead, Walmart’s shoppers are shifting to lower-margin options which is due to the resurgent inflation. For example, Walmart’s top category is groceries and that tends to be low margin compared with areas like apparel or electronics.

  

  According to the Bureau of Labor Statistics, food costs are up 9.4% in the last 12 months. What’s happening is that shoppers are forgoing goods like electronics, so low-margin groceries make a larger impact on Walmart’s bottom line.

  Walmart has over 5,000 stores and retail is a business that’s all about cost control. Walmart’s gross margins in the U.S. fell by 38 basis points, and operating expenses rose by 45 basis points.

  Interestingly, Walmart became a national company during the inflation years of the 1960s and 70s. Sam Walton made the store synonymous with low prices. Walmart wiped out Main Street in many small southern towns, but it was dedicated to giving shoppers low prices.

  Walmart’s CEO said that in the last quarter, the average ticket for customers increased by 3%, but they’re buying fewer items. Last year, the stimulus checks helped out, but that obviously wasn’t a factor this year.

  Traders showed little mercy as shares of WMT got pounded in today’s trading. At one point, shares of Walmart were down close to 12%. Since Walmart is a member of the Dow, today’s trading also led the Dow to badly lag the S&P 500.

  For its part, this morning, the government released its retail sales report for April and it showed a decent increase of 0.9%.

  TJX (TJX) will report tomorrow before the opening bell. Wall Street expects 60 cents per share. I suspect there are a lot of folks expecting the worst because the stock has not been doing well. TJX is down over 25% this year and the shares just hit another 52-week low today. The shares are lower now than where they were before Covid.

  The company was hit hard during the pandemic. Only recently has TJX started paying its dividend again and the last earnings report was not a good one. For its fiscal Q4, TJX made 78 cents per share which was 13 cents below estimates. Tomorrow’s report will tell us if TJX has regained its footing.

  On Thursday, Ross Stores (ROST), one of our Buy List stocks, is due to report. Ross is often lumped together with TJX, but I think it’s the superior investment.

  Ross handily beat its Q4 guidance although the retailer tends to be very conservative with its forecast. Ross has ambitious plans for the future. The CEO said that the company plans to grow the number of its Dress for Less stores to 2,900. That’s up from the previous forecast of 2,400. For dd’s DISCOUNTS, Ross now aims for 700 stores versus the earlier projection of 600 stores.

  For Thursday, Ross sees Q1 earnings of 93 to 99 cents per share. That’s almost certainly too low. Wall Street isn’t buying that range either. The current consensus on Wall Street is for earnings of $1 per share. I think it will be even higher. It’s tough to stick by a stock that has done so poorly, but I have a lot of faith in ROST’s team. This is a good long-term stock.

  Not all retailers are suffering. Today Home Depot (HD) said it beat expectations and the company raised its full-year guidance. For the quarter, HD made $4.09 per share. That was 41 cents more than expectations. Revenues came in at $38.91 billion. Wall Street had been expecting $36.72 billion. Here’s a revealing fact: Home Depot customers spent 11.4% more for each transaction but the number of transactions fell by 8.2%. That’s the impact of inflation.

  Before, Home Depot said it was expecting slightly positive sales growth for this year and low single-digits earnings growth. Now they’re expecting sales growth of 3% and earnings growth in the mid-single digits.

  It seems that high prices aren’t scaring off shoppers in all categories, and the home improvement sector is a vital one. Lowe’s (LOW) reports tomorrow.

  The Battle for Spirit Airlines

  I love a good bidding war. Sometimes I think modern Wall Street is too serene for its own good. It looks like we’re having some real drama in the battle to buy Spirit Airlines.

  On Monday, JetBlue (JBLU) announced it’s going for a hostile takeover of Spirit Airlines (SAVE). Earlier, JetBlue had offered $33 per share for Spirit but Spirit’s board shot it down. Instead, Spirit is going with the offer made by Frontier Airlines (ULCC) which is in stock and cash.

  This is where it gets interesting. JetBlue’s hostile offer is for $30 per share but they said the old $33 offer is still valid if JetBlue is willing to negotiate. In plain English, JetBlue is going over the heads of the board and making their case directly to the shareholders. That’s a bold move, but they have a point.

  On Friday, shares of Spirit closed at $16.98. I’ll note without comment that Spirit’s ticker symbol is SAVE.

  Under Frontier’s deal, Spirit shareholders will get 1.9126 shares of Frontier plus $2.13 in cash for each Spirit share they own.

  Since Frontier made its offer, its stock has been going down. The lower share price has meant a lower merger price for Spirit. JetBlue knows that and is banking that the shareholders will nix the deal. Spirit shareholders are scheduled to vote on the deal on June 10.

  At Frontier’s current share price, that works out to about $20 per share for Spirit. In other words, JetBlue is offering a hefty premium.

  JetBlue’s offer is further complicated because the government regulators may not like it. Also, the flight attendants’ union just gave its approval to Frontier’s deal.

  A little over a year ago, Frontier came back to the public market. The budget carrier sold 30 million shares at $19 a piece. It’s half that today.

  

  From my view, I can’t help wondering why JetBlue is so anxious for this deal. When you’re too eager for a deal, it’s as if you’re admitting you don’t have much of a future. None of these companies is very profitable. JetBlue hasn’t had a positive quarter since 2019. In the end, I think Frontier will prevail but I don’t think any of the shareholders will prosper.

  Airlines are a notoriously difficult industry for investing. It’s the only industry that was hurt by regulation and deregulation. There seem to be endless price wars that no one can win. At one point after 9/11, I recall that the entire combined history of civil aviation was a net profit loser. Even Warren Buffett took a bath with his USAir investment. Buffett later said that if a stockbroker had been at Kitty Hawk, he would have shot the plane down.

  That’s all for now. I’ll have more for you in the next issue of CWS Market Review.

  – Eddy

• Morning News: May 17, 2022
  Eddy Elfenbein, May 17th, 2022 at 7:06 am

  World’s Top Enabler of Financial Secrecy Is the United States

  U.S. Treasury’s Yellen and Trade Czar Tai at Odds Over China Tariffs

  Economists Expect U.S. Retail Sales Grew in April

  Cash Hoarding Rises to Highest Level in Two Decades

  What Higher Interest Rates Could Mean for Jobs

  Biden, Bezos and Inflation

  Tech’s High-Flying Startup Scene Gets a Crushing Reality Check

  Elon Musk Says Twitter Must Prove Bot Claims for $44 Billion Deal to Proceed

  Why Twitter has Ignored Elon Musk’s ‘Trolling’

  FDA Eases Baby-Formula Import Rules to Boost Supplies

  Nestle Airlifts Baby Formula to US From Europe to Ease Shortage

  In a Hot Job Market, Companies Hand Out Big Awards to Retain Key Executives

  Walmart Cuts Full-Year Profit Forecast as Fuel, Labor Costs Spike

  Home Depot Raises Full-Year Outlook After Earnings Beat, Record First-quarter Sales

  Disney Vows to Show Very Few Commercials on Ad-Supported Disney+

  Be sure to follow me on Twitter.

• JetBlue Goes Hostile for Spirit
  Eddy Elfenbein, May 16th, 2022 at 10:47 am

  The stock market has started the week on a down note but it’s not too severe. In fact, I think there’s a good chance the market will be positive before the closing bell.

  Many retailers are set to report their earnings this week. Home Depot and Walmart report tomorrow.

  One interesting story is that JetBlue Airways has launched a hostile takeover bid of Spirit Airlines. They had offered $33 per share but Spirit turned it down in order to merge with Frontier Airlines.

  JetBlue has said acquiring Spirit would give it access to a large fleet of Airbus planes, trained pilots and the ability to better compete against the “Big Four” U.S. airlines that control most of the U.S. market. Spirit rejected the offer to stick with a planned $2.9 billion-cash-and-stock deal to merge with fellow discounter Frontier Airlines. Those two airlines say a merger would allow them to grow and compete more easily.

  JetBlue on Monday offered Spirit shareholders $30 a share and encouraged them to vote against the Frontier deal during a June 10 shareholder meeting. The company also said its earlier offer of $33 per share is still on the table if Spirit decides to negotiate. Spirit’s shares closed Friday at $16.98.

  Lloyd Blankfein, the former CEO of Goldman Sachs, said there’s a ‘very, very high risk’ of recession.

• Morning News: May 16, 2022
  Eddy Elfenbein, May 16th, 2022 at 7:01 am

  Yellen Looks to Get Global Tax Deal Back on Track During Europe Trip

  Ben Bernanke Predicts ‘Stagflation’ Reminiscent of the 1970s

  How Do Higher Interest Rates Bring Down Inflation?

  Meet the Hedge-Fund Manager Who Warned of Terra’s $60 Billion Implosion

  China’s Economic Activity Collapses Under Xi’s Covid Zero Policy

  Saudi Aramco Posts Record Quarterly Profit on Surging Oil Prices

  America Leans on Aging Power Plants to Keep the Lights On

  McDonald’s to Quit Russia in Sign of Country’s Growing Isolation

  Renault Agrees to Sell Its Stake in a Russian Automaker

  Turkey’s FLO In Talks to Take Over Reebok’s Stores in Russia

  JetBlue Launches Hostile Takeover Bid for Spirit Airlines

  The Tesla Effect: Snowmobiles, Boats and Mowers Go Electric

  The Great London Property Exodus Is in Reverse as Tenants Return

  Walmart Woos College Grads With $210,000 Future as Store Bosses

  Goldman Sachs Allows Senior Staff to Take Unlimited Vacation

  Pay Packages for CEOs Rise to Record Level

  The Rich Are Not Who We Think They Are. And Happiness Is Not What We Think It Is, Either

  Be sure to follow me on Twitter.

• Twitter Acquisition “On Hold”
  Eddy Elfenbein, May 13th, 2022 at 11:23 am

  The stock market is having a big counter-trend rally today. That means that all the stuff that had been doing poorly is doing well, and the stuff that had been doing well is not having a good day. The S&P 500 is up more than 2% as I write this.
  Shares of Twitter are down sharply after Elon Musk tweeted that his takeover of Twitter is temporarily on hold due to concerns over spam. The stock has been as low as $40.01 today. Remember, the buyout price is $54.20 per share.

  In an interview yesterday, Jerome Powell said that two 0.5% hikes are likely:

  “If the economy performs about as expected,” Powell said, “it would be appropriate for there to be additional 50-basis point increases at the next two meetings.”

  Powell was also confirmed by the U.S. for another four-year term as Fed Chairman.

• Morning News: May 13, 2022
  Eddy Elfenbein, May 13th, 2022 at 7:02 am

  Russian Shipping Traffic Remains Strong as Sanctions Take Time to Bite

  Russian Tanker Giant in Deals to Sell Ships Amid Western Sanctions

  World Stocks Clamber Off 18-Month Lows, But Markets on Recession Watch

  Fed Chair Says Bringing Inflation Down Will Take ‘Some Pain’

  Cryptocurrencies Melt Down in a ‘Perfect Storm’ of Fear and Panic

  BofA Strategists Say Investor Exodus Signals ‘True Capitulation’

  What BlackRock, Vanguard and State Street Are Doing to the Economy

  Global Diamond Trade Fractures Under the Weight of Russia Sanctions

  Where Is Guinea’s Gold? A London Laundering Case May Hold Clues

  All of Those Quitters? They’re at Work

  Elon Musk Says Twitter Deal Is on Hold, Sending Shares Lower Premarket

  Tesla Puts India Entry Plan on Hold After Deadlock on Tariffs

  Baby Formula Shortage Could Leave Parents Scrambling for Months

  Inside the Collapse of CNN+, the News Channel’s ‘Apollo Mission’

  Pod People: Home in Pricey Bay Area Will Rent Bunk Beds for $800 a Month

  Be sure to follow me on Twitter.

• Morning News: May 12, 2022
  Eddy Elfenbein, May 12th, 2022 at 7:01 am

  Europe Refiners Benefit from U.S. Emergency Oil Stock Releases

  US Budget Deficit Shrinks $1.6 Trillion on Record Tax Surge

  Inflation Is Headed Lower—But Maybe Not Low Enough

  Consumer Prices Are Still Climbing Rapidly

  Bitcoin Is Increasingly Acting Like Just Another Tech Stock

  More Than $200 Billion Wiped Off Cryptocurrency Market in a Day

  SoftBank’s Son Pays Price for Tech Bets With $20 Billion Loss

  Oil Giant Saudi Aramco Is Now the World’s Most Valuable Company, Bumping Apple from The Top Spot

  Social-Media Regulations Expand Globally as Elon Musk Plans Twitter Takeover

  SEC Probes Musk’s Twitter File Lag

  Disney Reports Jump in Disney+ Subscribers in Latest Quarter

  Disney Path to Subscriber Success Is Outside U.S.; Way to Profit Less Clear

  Starbucks Baristas Are Unionizing, and Even Howard Schultz Can’t Make Them Stop

  A Union Blitzed Starbucks. At Amazon, It’s a Slog.

  Mary Barra’s ‘Long Game’: Winning the E.V. Race

  Beyond Meat’s Stock Slides 20% On Weak Sales, Heads Lower Than IPO Price for First Time

  Be sure to follow me on Twitter.

• The April CPI Report
  Eddy Elfenbein, May 11th, 2022 at 9:55 am

  The inflation report for April came out this morning and it showed that inflation still plagues the U.S. economy. For the month of April, consumer prices rose by 0.33%. That’s the lowest since August 2021. Over the last year, consumer prices are up 8.22%. That’s down some from the 12-month figure ending in March.

  The drop in gasoline helped a lot last month.

  The price gains also meant that workers continued to lose ground. Real wages adjusted for inflation decreased 0.1% on the month despite a nominal increase of 0.3% in average hourly earnings. Over the past year, real earnings have dropped 2.6% even though average hourly earnings are up 5.5%.

  (…)

  The CPI gains came even though energy prices declined 2.7% for the month, including a 6.1% drop for gasoline. The BLS food index rose 0.9% in April, countering the deceleration in energy. On a 12-month basis, energy costs were still up 30.3% while food rose 9.4%, according to unadjusted data. Gasoline costs at the pump this week reached their highest level ever not adjusted for inflation.

  Core inflation rose by 0.57% last month. That’s pretty much in line with the last few months. The 12-month increase to core inflation is now at 6.13%.

  Airline fares continued their climb as more people take to the skies amid increased business travel and vacations. Prices rose 18.6% on the month and are up, according to unadjusted data, 33.3% over the past year.

  Auto sales also have been a big contributor to inflation as supply chain issues, especially with the semiconductors vital to vehicle operating systems, have pushed prices up. Used vehicle prices fell 0.4% on the month but new vehicle prices rose 1.1%. Prices rose 22.7% and 13.2% for the two categories respectively over the past year.

  April also saw big price increases across selected food areas. Chicken was up 3.4% and eggs surged 10.3% amid a bird flu scare, while Bacon rose 2.5% and breakfast cereal was up 2.4% Ham prices fell 1.8%.