THE TRAVELLING EDGE (10 October 2017)

Note: writing from Japan, I am 13 hours ahead of N.A. so the date above may not match your date.

U.S. Small Business Optimism Wanes

The National Federation of Independent Business reported that its Small Business Optimism Index declined to 103.0 during September following little change during August. In was the lowest level of confidence since November, but remained up y/y.

A greatly lessened 17% of firms reported that now was a good time to expand the business and a lower 15% of firms reported that they were expecting higher real sales. Both of these indications were the weakest since November. A much weaker 27% of firms planed to make capital outlays in the next 3-to-6 months. Showing a lesser decline was the percentage of firms which were expecting the economy to improve. Moving higher was the percentage of firms indicating that credit was harder to get.

On the labor front, an improved 19% of firms planned to raise employment, equaling the most since November 2006. Finding employees was a little easier m/m as a lessened 49% of firms indicated they had few or no qualified candidates to fill job openings, but that remained up from 46% during all of last year. Twenty-five percent of firms raised worker compensation. That’s below a high of 30% in January, but up from 24% three months ago. A higher 18% of firms planned to raise compensation in the next three months.

On the inflation front, a lessened six percent of firms actually raised average selling prices last month following strength in July and August. The percentage of firms planning to raise average selling prices also eased to 19% and has moved sideways this year.

A slightly higher 21% of firms indicated that taxes were the single most important problem. A sharply higher 19% felt challenged by the quality of labor, equaling the most since 2001. A steady 16% reported that government requirements were the largest single problem. A greatly lessened seven of firms reported insurance cost & availability as the largest hurdle, but a slightly higher eleven percent of firms indicated that poor sales were the largest single problem. A strengthened eight percent reported competition from large businesses as the largest problem. A greatly lessened five percent felt that cost of labor was the largest single problem. Inflation was reported as the largest problem by a low two percent of respondents.

Roughly 24 million small businesses exist in the U.S. and they create 80% of all new jobs.

What Trump Bump? Businesses Aren’t Borrowing from Banks

Since President Donald Trump’s election, bankers and investors predicted that pro-business policies would lead to a surge in corporate borrowing, which would help bank profits.

Instead, the growth of loans to companies has dropped precipitously since last November—to 2.1% from 8.1%, according to Federal Reserve data. (…)

BB&T, for example, said in July that it expected overall loans to be up 1% to 3% in the third quarter compared with the second quarter. In mid-September, the bank walked that back, saying it expected loan growth to be slightly down in that period. (…)

Wal-Mart Increases Cost Cuts Amid Amazon Competition

Wal-Mart Stores Inc. WMT 4.47% plans to open fewer U.S. stores than it has in at least 25 years and deepen its cost-cutting efforts, attempting to free up cash for e-commerce and store improvements in an increasingly competitive retail environment. (…)

On Tuesday it outlined plans to lower expenses as a percentage of sales from 21%, where it stands this fiscal year. Wal-Mart has started using zero-based budgeting in some corporate units (…).

Wal-Mart said it expects adjusted earnings per share growth of 5% in its 2019 fiscal year to outpace sales growth of about 3%, confirming its profit goals laid out last year.

The company maintained its adjusted earnings per share guidance in the current fiscal year of $4.30 to $4.40.

The company also announced a new $20 billion share-buyback program, which it intends to use over the next two years.

The new buyback authorization replaces a $20 billion program announced in October 2015.

At $84, WMT is selling at 19.3x current year estimates, growing at 5% on a forecasted 3% revenue growth rate…

Global economy enjoys best quarter for three years, inflationary pressures hit 6½-year high

The headline JPMorgan PMI, compiled by IHS Markit, was unchanged from August at 54.0. The robust performance rounded off the best quarter since Q3 2014. Historical comparisons suggest that the latest PMI indicates that global GDP (at market prices) is rising at a solid annual rate of around 2.5%.

Unlike many previous spells of stronger economic expansion, global growth is also well-balanced, with similar rates of expansion seen in manufacturing and services in recent months. While manufacturing and trade lagged behind robust services expansions in 2014 and 2015, rising goods trade has accompanied a broader services upturn over the past year, the latter indicative of rising domestic demand in key developed markets such as the eurozone, Japan and the US.

EARNINGS WATCH

The Q3 earnings season is underway with 23 companies having reported. The beat rate is 87% with a 6.3% surprise factor. Twelve of the reports were from consumer-centric companies. Their beat rate was 83%  and the surprise factors were +7.2% for the 6 Consumer Discretionary companies and +3.2% for the 6 Consumer Staples companies.

Trailing EPS are now $127.08, continuing their rising trend since their July 2016 low of $114.00. Combined with the drop in inflation from +2.3% to the current +1.7%, the Rule of 20 Fair Value has risen from 2020 to 2325 (+15%) during that period. The S&P 500 Index is up 17.3% during the same 14 months. Pretty rational and fundamental move even if equities remain on the expensive side.

Since June 2017, the inflation rate was stable but trailing EPS edged up 1.8% while the S&P 500 Index rose 5.3%. We shall see how inflation, EPS and corporate guidance behave during the next month but so far, so good. Very important as the Fed is turning hawkish.

Celebrity Endorsement Comes to the IPO Market Some startups are trying to lure investors to a risky new kind of share offering with an old tactic: the sheen of celebrity. These firms are using a process that helps small businesses to go public through a crowdfunding approach.

(…) Whether celebrity endorsements can generate more interest and better results remains to be seen. But dozens of companies are trying to list through this shortcut approach, hoping star affiliations will rub off on them. (…)

There is also YayYo, a company that billed itself as a ride-hailing aggregation app. Its late-night TV commercials for its Reg A+ offering featured John O’Hurley, the actor who played fashion-catalog mogul J. Peterman on Seinfeld. YayYo says it paid Mr. O’Hurley for his endorsement but declined to say how much.

The company has since changed course, though it still is planning to go public. Ramy El-Batrawi, YayYo’s founder, said the firm is now focusing on buying cars and renting them to drivers. He has stopped running the J. Peterman ads on TV. (…)

Hmmm…