"Don't send me flowers when I'm dead. If you like me, send them while I'm alive." -- Brian Clough
Not So Fast
To paraphrase the classic American author Mark Twain, reports of the death of retail in the U.S. have been greatly exaggerated. While it's true that news of the world's greatest logistics firm moving into any industry space such as recently seen along grocery lines can send shock waves though said industry, many traditional retailers have drawn defensive lines from where they have started to fight back.
It is from here that these retailers can re-learn their business. It is from here that many of these firms will re-learn the whole inventory building game in a different way, while they evolve their internet lines of business so that they may avoid simply disappearing. It is old news now that Amazon (AMZN) took down Whole Foods as an entry point into one field that the firm had not mastered. There was one firm, Walmart (WMT) , that had actually shown up for a fight with Amazon, when most of the other retreated. Walmart was damaged by this foray into the grocery business, and responded by making an alliance with Alphabet (GOOGL) in order to head "Alexa" off at the proverbial pass. Gang war? Oh, yeah. The two toughest kids on the block are gearing up for a long, long fight.
While this has been going on, much of the rest of retail is quietly drawing battle lines. Finally, these firms seem to be making a serious attempt at making a stand. You can see it in the recent equity performance of these names. It is true that year to date, while the S&P 500 has gained 11.5%, that the index has been easily out-performed by AMZN (+31%), and by WMT (+15%), as those two were for many months, the only ones in this fight. The worm has started to turn.
While these two tough guys have been battling each other, they stagnated over the summer. Over the last three months, WMT is flat, while AMZN is up less than 2%. Some of the other names in the space have started to show life. Nordstrom JWN was up 6% on Wednesday, as the family with the name on the door appears to have found help in funding its buyout of the stock. So, JWN is different. Over the past month, though, Kohl's KSS has roared 15%, Macy's M has rocked 11%, and Target TGT has soared 9%.
What these firms are learning to do is run skinnier on inventory through big data. That saves a lot of dough. On top of that, in some cases, these firms are finding better ways to draw potential from their real estate. They'll do that either through specialization, or the outright leasing (or sale) of space. Want more? Let's talk dividends. Walmart will pay you a very decent 2.6%, while Amazon laughs at you for asking. The rest of the field? They won't dare cut their dividends until they get down to the nitty gritty. Macy's pays 6.8%, Kohl's pays 5%, and Target pays 4.3%.
Game on? Let's just say that Amazon may have already picked the low-hanging fruit. As the planet is slowly drawn out of its orbit and into the sun, there will be no monopoly. Two fisted. I remain long WMT and KSS, while shopping for a third retailer to round out my portfolio.
Tax Reform Stays Hot
Now that President Trump has crossed the aisle once, he seems to be unbound by the shackles that partisan politics can hold over performance. Can it be true? A president meeting with a bi-partisan group of Congress people to discuss compromise on DACA, and on tax reform?
Republican leadership has been working on making noticeable progress on cutting taxes this year, with little to report back to the American people as of yet. We all know what we, as investors, and regular working folks want to hear. Lower corporate taxes, lower income tax for the middle class, a repatriation holiday. This president, whose undisciplined style has caused him more trouble that it was probably worth, suddenly seems to be playing ball with anyone who also wants to play ball. This, my friends, gives us the best chance we've seen to actually make progress in the tax reform space since the Reagan years.
The president said "The wealthy will be pretty much where they are. If we can do that, we'd like it. If they have to go higher, they'll go higher, frankly." Party time? Tax cuts just around the corner? Not likely. What this does mean though, is that nobody in Washington has a friend in the White House, but also that nobody has an enemy. This actually sets up "The Deal". In my opinion, this story may be a 2018 story. That said, if there really is a chance for a bi-partisan deal on DACA, a bi-partisan deal on tax reform, and a fiscal package aimed at disaster recovery, infrastructure improvement, and a military build-up, then 4% GDP growth is not ridiculous. Just one kid's thoughts on the matter.
Just How Safe Is GE's Dividend?
Like many, I looked at Jeffrey Immelt's departure from General Electric (GE) as a positive for the stock. The fact that Warren Buffett had left the name, I would have also thought a positive, now that such a large seller had completed its presence on the offer side of the price discovery mechanism. Still, the stock has continued to drift lower this month. That was when I bought the name. A month later, the stock is nearly a dollar lower. Surprised? Only mildly.
Obviously, GE had issues, or the stock would not have spent nearly this entire millennium badly underperforming a roaring stock market. The stock price had actually started to show some life at the start of September. Then, poof! JP Morgan's Stephen Tusa mentioned in a note to the firm's clients that "GE is already below breakeven when it comes to funding the dividend with ongoing free cash flow, with compounding risk if fundamentals come in worse than expectations." Tusa did also mention that he believed that the dividend was safe for now, but wow. Just wow.
We will not go into how poorly managed this firm has been for many years. That fact is clearly obvious. The question becomes just what does new CEO John Flannery do about it. Cutting the dividend will break the stock. That, he doesn't need. Being long the name for under a month, I am only down dimes. Some of you are down dollars. This has been a painful slog for many. General Electric reports third-quarter results on Oct. 20. Officially, the street is looking for $0.50 a share on just under $32 billion. Will Flannery have to ratchet down expectations prior to this release? Will Flannery have to sell assets or business lines in order to further streamline the company's direction, or just to pay the shareholders?
The firm's debt to equity ratio is roughly 170. By comparison, GE's closest rivals all have much lower such ratios. 3M MMM, Honeywell HON, and United Technologies UTX, all sport debt to equities ratios standing between 80 and 97. In GE's defense, the firm has a higher quick ratio than every one of these rivals, meaning that the firm should have no problem meeting short-term financial liabilities. What I think is that you simply hold at this level. Flannery has already stated that the dividend is a priority. You may see some downside if Flannery adjusts expectations. That is precisely when the bargain hunter hunts. That is when we dine on the bones of the frightened. Till then, let's focus elsewhere.
Quick Trade Idea
Oracle (ORCL) reports Thursday night. The street looks for $0.60 a share on little more than $9.0 billion. Like the way these guys are headed. Missed the recent run up? $51.50 puts expiring this weekend went out last night at $0.56. If you like the name and are not interested in chasing, you could write those puts and raise the $0.56 cents. If the stock reacts well to earnings, you paid for lunch. If not, you're wearing them at a net cost under $51 clams. Not bad, if you like a stock that closed at $52.80 last night.
In other news, TheStreet got Kiss legend Gene Simmons to reveal his latest stock market call.
08:30 - CPI (August): Expecting 1.8%, July 1.7% y/y.
08:30 - Core CPI (August): Expecting 1.6%, July 1.7% y/y. Here we are. Quite possibly the most important series in domestic macro-economics -- I mean, after wage growth and the very similar PCE data. Increased inflation at the consumer level could force the FOMC to act on interest rates sooner than they might like, given that they have to get the ball rolling on whittling down that balance sheet. Inflation growth did actually appear to finally find a bottom in July, albeit at very low levels. Energy prices will likely help support the headline print today. At the core, this looks like it could be another tough one.
08:30 - Initial Jobless Claims (Weekly): Expecting 300,000, Last Week 298,000. This weekly measure of first-time claims for jobless benefits rocketed to much higher levels last week, as more than 50,000 Texans filed in the wake of Hurricane Harvey. I would expect that Hurricane Irma will also pressure this series, and we see our first print above 300,000 since March 2015.
10:30 - Natural Gas Inventories (Weekly): Expecting +40 billion, Last Week +65 billion cubic feet. Natty Gas is up against resistance that has held since mid-July. Get a break, and some support here, we could see another nickel paid for these futures in my opinion. As much as the weaker dollar has aided commodities in general, inventory building has been no friend to this commodity. Today likely will bring us a 24th consecutive weekly build for the series.
Sarge's Trading Levels
These are my levels to watch today for where I think that the S&P 500, and the Russell 2000 might either pause or turn.
SPX: 2513, 2506, 2498, 2490, 2481, 2469
RUT: 1445, 1436, 1429, 1423, 1418, 1411
Today's Earnings Highlights (Consensus EPS Expectations)
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