Eq: Total Market
Morgan Stanley has just published a list investors should probably pay attention to. The bank’s research has chosen ten stocks which it says may tank. It is unusual for bank analysts to have negative views of stocks, but when they do, it is worth listening to. Without further ado, the list is: Abercrombie & Fitch, Avis Budget Group, Bed, Bath & Beyond, EQT, FitBit, Hertz Global Holdings, Juniper Networks, MSG Networks, Seaspan, and Tenneco.
FINSUM: The most interesting ones for us are the car rental companies (Hertz and Avis). They say ride-sharing is a risk, as is a decline in used car values. We agree with the former, but we think the latter is off base because as new car buying slows (as does the economy), used car sales will pick up.
Jack Bogle, the founder of Vanguard, is a legendary name is investing. Not only did he found and grow one of the largest asset managers in the world, but he has a habit of being right when he predicts returns. Well, he has just made another prediction, and unfortunately it is not one investors will like. He thinks returns over the next decade are going to lag their historical levels badly. His forecast is that investors can expect a 1.75% net return with a 50%/50% stock-bond portfolio over the next decade.
FINSUM: If this call turns out to be right, it will have huge implications for retirees and pension funds, as “safe spending” rules and total returns for pensions will be devastated. That sad, we think forecasting that far out is all but useless.
One of the pillars of this nearly decade-long bull market has been the growing profits of US corporations. US stocks have seen their profit margins rise steadily since 2009 and are around a record mark of 10%. Analysts continue to forecast growth to around 12% in 2020. At the beginning of the 1990s, margins were just half of now. However, this narrative is fraught as just 10 stocks account for around 50% of all the margin growth in the S&P 500 since 2009. Those stocks? All tech, unsurprisingly. But what it means is that many other companies are not as healthy as many assumed, and as we enter a tougher era for margins, including higher labor costs, increased input costs, and higher interest costs, there could be some steep falls.
FINSUM: We think this is a reason to worry, as when margins really start to fall on the back of higher rates and costs, investors are going to be very alarmed.
On the whole retail has had an okay year, certainly much better than the rough period of 2017. Lately though, stocks in the sector have been suffering. Will that change? The good news is that the initial evidence about the performance of the current holiday shopping season looks promising. Black Friday sales were strong this year, which bodes well for seasonal shopping. 165m Americans shopped in-store or online during Thanksgiving weekend, more than surveys forecasted, and the average purchase size was over $300. Department stores seemed to be doing particularly well, as foot traffic was up almost 8% over last year.
FINSUM: We think this is going to be a good holiday season for retailers, but that probably won’t be enough to convince investors that the underlying issues have been resolved.
There have been a lot of recession indicators lately—the yield curve, slowing growth, the end of the tax cut boost. However, one that really catches the eye this week is GM’s massive job cuts. The company is shedding over 14,000 jobs across many states, including in Michigan, Maryland, and elsewhere. The cuts amount to 15% of its work force. The move comes in response to slowing sales and changing tastes. All of the plants being closed make parts for passenger cars, not the SUVs that have become much more popular with buyers.
FINSUM: This could either be the canary in the coalmine, or it could be a response to the very specific automation pressures that are hitting the car market.
The stock market has had an undeniably rough quarter. We are currently in the midst of the second big rout in the last two months and indices and markets are essentially flat for the year. However, things are actually much worse than flat if you dig slightly deeper. Get this—forward looking P/E ratios are down a whopping 17% this year. In fact, the fall recently has been one of the worst in decades on a valuation basis. In 2008, valuations only slid 18%, just one percentage point more than this year. It is the third biggest drop in valuations since 1991.
FINSUM: This is a very ominous sign in our opinion, as shares have plunged even as stellar earnings have come out. Classic case of buy the rumor (2017), sell the news (2018).