Good morning contrarians! Welcome to the Daily Contrarian, our morning look at events likely to move markets. It is Thursday, Aug. 15. The Bottom Line segment of today’s podcast starts at (4:30) and Stocks on the Contrarian Radar at (6:23) for listeners who want to skip ahead.
State of Play
Yesterday turned out to be a blah day after the CPI met estimates pretty square on the nose. As we look at our board of indicators at 0650, things are a bit all over the place with no clear and obvious signs of direction quite yet:
Stock index futures are doing very little, with just the Russell 2000 which tracks small caps moving at all from the break-even point, and that lower by 0.3%;
Commodities are gaining ground. WTI crude oil is up <1% to trade around $77.50/barrel. Copper is up 1.6%;
Cryptos are moving in the opposite direction from commodities again, with Bitcoin down 4.5% to trade around $58,300;
Bonds are unchanged. The 2-year yields 3.96% whilst the 10-year yields 3.84%.
Today’s Known Events
Walmart (WMT 0.00%↑) earnings beat estimates and management raised guidance. That has caused a predictable pop in the stock this morning, to the tune of 4% at the time of this writing. That moves WMT to a fresh multi-year high. Other companies reporting:
Alibaba (BABA 0.00%↑) and JD.com (JD 0.00%↑) reported mixed results. BABA is moving lower, JD higher as the company reported record net profits;
Deere & Co. (DE 0.00%↑) beat on top- and bottom-line and is moving higher in the pre-market, to the tune of 4% at the time of this writing;
Applied Materials (AMAT 0.00%↑), a big supplier to the semiconductor industry, reports after the close at 1600.
Initial jobless claims are out at 0830. Economists who were surveyed expect 236,000 new claims, little changed from last week’s 233,000. That’s below the four-week average of 241,000.
Retail sales are also out at 0830. The expectation here is for an increase of 0.4% month-over-month to the headline figure, which would be an improvement over last month when it was unchanged. Core retail sales, which exclude automobiles, are only expected at 0.1% MoM however, after 0.4% last month.
Industrial production is out at 0915. This is expected to drop by 0.3% MoM after a 0.6% increase last month. That would be the first negative print since February, so worth keeping an eye on that as well.
The Bottom Line
Consumer prices yesterday came in pretty much exactly as anticipated and markets were unmoved as a result. Probably producer prices the day before told us everything we needed to know about inflation anyway. As we’ve been saying for a week, the labor market is now the bigger game in town. So initial jobless claims could be big, even though it’s just a weekly report. Any sign of labor market softness could spook the market.
So could softer-than-anticipated industrial production or retail sales. One would think that these metrics usually trail employment trends but maybe not always. If the consumer did start pulling back in July then, well, it wouldn’t be good.
Where Walmart earnings are concerned, this is a positive sign for the lower end of the retail market. That is a relief as investors were concerned there after what McDonald’s (MCD 0.00%↑) and others had been saying in their earnings.
Stocks on the Contrarian Radar©️
Google (GOOG 0.00%↑) has taken on water lately, down 13% over the last month over regulatory concerns, with the latest now that the company could be broken up. As you can see from the blow chart, this has caused GOOG to diverge from the Nasdaq 100 (QQQ 0.00%↑) benchmark:
Not being a legal expert, the Contrarian cannot really speak to the likelihood of this taking place. One would imagine Google has done enough lobbying over the years to guard against this uncertainty, but that’s not a legal opinion. Uh, right?
Even if the company is forced to break apart, it’s not like shareholders will be left with nothing. They will instead be left with the various parts that emerge from the break up. Apparently these could be Android, Chrome, and Google Ads. One could make the argument this would, over time, possibly be a better outcome than if the whole thing were allowed to continue as its own entity.
The concern is that Google will lose its competitive advantage if that takes place. Maybe those concerns aren’t entirely unrealistic. For now, the key metrics point to a stock that is not particularly cheap even after the recent sell-off: 21x forward earnings, 5.7x forward sales, 15x forward cash flows. That looks a lot like a growth stock (which Google has been historically) and not like a value play.
For this reason The Contrarian is going to sit this one out for now. It’s worth pointing out that the government last tried to break up a company in 2001 and failed pretty spectacularly. That company was Microsoft (MSFT 0.00%↑). Lobbying and entrenched business interests have only increased in the 20+ years since then. It would seem to be a bit of a long shot if you’re betting on the likelihood of a breakup actually happening. (Again, not a legal view. Just one based on the money trail).
Housekeeping
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