Durable Goods Data, Target Earnings and Rumors

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After a few days of market pressure we did get a bounce off the lows. What is noticeable is the intraday volatility that is increasing and also the short-term supports are fairly weak. More focus has moved from the fundamentals and equity markets, shifting back towards the politics of Italy and our own sequester battle. This uncertainty can drive more intraday volatility into the market and also weaken short-term supports. I would expect continued volatility in the market throughout this week and into next week as the sequester battle heats up.

Durable Goods Data, Target Earnings and Rumors

While our focus has been redirected to the political realm, we still need to look at and assess economic data.

This morning the Commerce Department released data on non-defense capital goods orders (excluding aircraft), which is closely watched to determine business spending. The number jumped 6.3% after slipping in December by 0.3%. Economists expected a small rise of 0.2%. If we exclude transportation, the number increased 1.9%, the largest gain in over a year. Initially these numbers are good, but when we look at the overall orders for durable goods, the numbers dropped 5.2%, the first drop in almost a year and non-defense shipments fell 1%.

The strong core rise, however, is boosting confidence that the economy is nicely rebounding. However, this again is one data point and the overall number is down. I don’t think the huge upside surprise in the core is going to change the Fed’s monetary policy.

The report, in totality, was mixed and really hard to gauge whether it was good, bad or neutral. Total numbers dropped 5.2%, the core is up 6.3%, shipments of non-defense capital goods fell 1%, and the core, excluding transportation, was up 1.9%. Which number should we get excited about and which tells the full story? I don’t think we can cherry pick the good numbers and ignore the bad. I think an objective observation would conclude that the domestic economy, as a whole, remains stagnant, but there are a few bright spots.

Target’s (TGT) earnings beat forecasts with a net income at $961 million, but is down from $981mm a year ago. But on a share basis it beat, coming in at $1.47 a share vs. $1.45 a share. To eliminate confusion, the reason it beat on a per share basis is that there are fewer outstanding shares. A little, but well known secret in the industry, is that one purpose of share buy-backs is to reduce the number of shares outstanding. This allows a company to continue to beat the previous year’s growth rate on a “per share basis” as there are fewer shares. That is why I continue to mention one must pay attention to TOP LINE REVENUE first and foremost, as well as sales growth and same store sales. It is THOSE numbers and not earnings that will reflect actual growth. The good news is that target saw a top line revenue increase of 7% to $22.73 billion from $21.29 billion from a year ago. So the question we must ask is if top line revenue increased, how come bottom line revenue decreased (bottom line revenue determines the profit or loss of a company)? It seems that, after looking through the report, the company faced some margin squeezes which came through product discounting to move more merchandise. Target faced a difficult time in November and December, but made it up with a 3.1% increase in January. Clearly this shows that the holiday season last year was weaker than initially expected and that was reflected in the same store sales figures. Target increased their revenue numbers through giving steeper discounts to move inventory and that impacted their bottom line. However, while their latest quarter has some serious bumps over the holiday season, their full year forecasts of $4.85 to $5.05 is above analyst’s consensus of $4.83. It is that forecast and the rebound in January that has helped boost confidence, moving the stock is up in the pre-market.

Walmart (WMT), on the other hand, said its February sales got off to a slower start than usual; primarily due to the delay in tax-refunds and the 2% increase in the pay-roll tax, which is impacting consumers. It is important to note that Target’s report does NOT include February data, so all eyes will be watching to see how Target does in February and if they, too, have the same “slowness” factor that Walmart is reporting.

Target is a perfect example of how we must closely pay attention to the numbers and how the numbers are calculated. If we didn’t pay attention to the net income numbers and only looked at the per-share basis, we would incorrectly assume that they had higher profits; however, that was clearly not the case. Fewer shares outstanding increased the per-share basis earnings on LOWER revenue. Remember to always focus on the how the numbers are generated, what they are really measuring and IF there is anything else affecting those numbers that may artificially impact the results. Target is not alone in this. The government’s economic data is frequently loaded with adjustments such as their “seasonal adjustment” factors, for which they don’t really explain why, how, or what. At least companies are held to a higher standard in which we can review the net income, revenue, and sales numbers.

There is a rumor that Coach, Inc (COH) may be a target of or in negotiations for a sale or merger. There is nothing confirmed or solid on this, but the stock is up over 4% in the pre-market. Watch the options action and strikes to see if there is any activity.

Support & Resistance

INDU 13,800
We bounced off that 13,800 level and the pre-market futures are looking flat in the pre-market. While there is mixed economic data and the retail numbers from TGT are better than expected, I believe the political sequester debate will take center stage.

NDX 2700
We are holding above that 2700 level and it seems that we have put in some supports in some of the big names in this index; however, I wouldn’t hold my breath and would expect continued intraday volatility.

SPX 1500
This is a key level and an area we need to pay attention to. I would think of it as more of a straddle strike rather than a support or resistance level.

RUT 900
The RUT seems to be in a similar position and is waiting to determine if we should rally or fall further. The dollar index remains strong and the 10-year yield has decreased a little, but not enough to show a panic. Of course 80% of the treasury buying at this point is the Fed, so I am not sure how much the remaining 20% of the players are really driving this bus.

I’ve received a few emails about my critical assessment of the Sequester. Let me remind everyone of a few key points.

  1. We have increased government deficit spending 300% since Bush left office. Bush’s deficit spending was $400 billion per year and now we are at $1.2 trillion per year, on average.
  2. We have raised taxes in several categories, including the top 10% as well as a 2% increase on everyone after the ending of the pay-roll tax cuts.
  3. We have not cut ANY spending in the last 4 years. It is true that the President and Congress have made a deal during the previous debt ceiling debate to cut FUTURE spending, but that is not REALLY cutting current spending.

The Sequester is $85 billion for the fiscal year; or $100 billion for the total year. That is less than 2% of total government spending.
If we can’t cut 2% spending after a whopping 300% increase in deficit spending and raising taxes, then how can we possibly make any REAL cuts in spending? The government just cut the incomes of all working Americans by 2% (removing the pay-roll tax cut); maybe it is time for them to cut their spending by the same amount.

I hear all this talk about a balanced approach, however, there hasn’t been any balance presented. We have RAISED spending and RAISED taxes, but we haven’t cut ANYTHING. A promise to REDUCE spending in the future is not really spending cuts, no matter HOW the President wishes to spin it.

Lastly, it was the President that introduced and signed in the budget agreement of 2011 the Sequester. If he was never willing to adopt such a measure, than why ever suggest it? If it was a bluff, because he though Republicans would back down, well, his bluff was called. Whose fault was it to introduce it and sign it into law?

The President has an excellent marketing campaign. I saw a poll in January that asked Americans if they knew what the Sequester was; 70% didn’t even know what it was and almost 40% never heard of it.

Today, a NBC/Wall-Street journal poll asked whether the sequester is a bad idea and an overwhelming amount, 50%, said it was and that we shouldn’t do it. Wait a second; last month 70% didn’t know what it was and almost 40% never heard of it, but now 50% of the population thinks it is a bad idea.

I guess President Obama’s fear mongering in 4 recent speeches has convinced a majority of Americans, who had never heard of it or don’t know what it is, that it is a bad idea and we shouldn’t do it. Of course, it could also just be how the polling questions were phrased. Who knows? I do know that President Obama is a great orator and has some serious marketing muscle. I am just wondering if the sheople just nod in agreement with him because it is easier than doing the homework and thinking for themselves.

Sorry for the rant and sarcasm, but I just had to respond to the comments spurred from yesterday’s preview. Hopefully I have provided some food for thought and encouraged readers to do a little research of their own, rather than just regurgitating the latest political rhetoric out of Washington.

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