The Dow Jones Industrial Average continued its meaningless assault on 20,000 last week, at one point on Friday trading within 0.37 points of hitting the target before closing up 1.02% for the week at 19,963.80. The S&P 500 rallied by 1.7% to finish at an all-time closing high 2276.98 while the Nasdaq Composite Index also hit a new all-time closing high of 5521.06. I don’t have the vocabulary to express how unimpressed I am with all of this nonsense.
The fact that the market is rallying with the economy so weak may or may not be surprising or justified – markets are often driven higher by sentiment – but needs to be seen as a very fragile state of affairs. Chasing stocks at their current values is a risky proposition.
While the headlines were all making happy talk, under the surface investors were throwing money at some of the worst pieces of trash out there. While struggling retailers like Macy’s, Kohls, LBrands and others took it on the chin after reporting lousy fourth quarter results, investors marked up the stock of Sears Holdings, Inc., which pre-announced another quarter of double digit same store sales declines and sold one of its last crown jewels, Craftsman, and borrowed another $1 billion from its controlling shareholder to stay afloat. By Friday, however, Sears stock was dropping hard again.
The same thing is about to happen to this garbage stock.
WTW Is Fighting An Uphill Battle
One of the money-losing companies that rallied sharply recently was Weight Watchers International, Inc. (NYSE: WTW), which popped up when it announced the totally irrelevant news that major shareholder Oprah Winfrey lost more weight (I mean, seriously, is that not the stupidest reason ever given for a stock to rise in the history of markets? And by the way, unless Oprah plans on becoming the Incredible Shrinking Celebrity, she can only lose so much weight before the company is going to have to come up with some other fake news to prop up its stock).
The truth is, WTW has been struggling to reach consistent profitability for years. Moreover, it has done so under the weight (sorry) of an enormous debt load that sooner or later it is going to have to admit that it can’t pay.
Reading WTW’s balance sheet is enough to give anybody an upset stomach. In fact, if they handed out copies of their financials to their customers rather than their diet food, it would probably help them lose weight. The company is sitting on long term debt of $1.986 billion and its cash and cash equivalents dropped from $241.5 million at year end to $99.0 million at the end of October after it repaid $208 million of bank debt. Interestingly enough, the company’s debt consists entirely of bank debt that matures in 2020. Until then, it only has to repay $21 million of principal in 2017, 2018 and 2019 before refinancing the remaining $1.958 billion. It better hope it keeps its banks happy.
It’s not like the company isn’t making money. It’s just that it’s not making nearly enough money to grow out of its crushing debt load. And growth is slow. Revenues for the quarter ended Oct. 1, 2016, grew a measly 2.7% from the year earlier quarter. Operating income grew 5.8% while net income grew a healthier 59%. For the nine months ended Oct. 1, 2016, revenues shrunk by -0.85%, operating income grew by a weak 1.5% and net income grew by 23%. The rise in third quarter net income appears due to reductions in non-operating items (interest expense and taxes), not any great improvement in the actual business. It seems that the best thing the company’s business has going for it is Oprah’s waist line. Every time Oprah tweets or makes a commercial about her experience with Weight Watchers, the stock jumps, demonstrating without a doubt most investors are morons. That creates an opportunity for us to make some money because this company is like an out-of-shape marathon runner that isn’t going to make it anywhere close to the finish line.
People lose weight all the time and then they gain it back. That’s why companies like WTW exist. But companies that gain weight generally don’t lose it without taking down their shareholders with them. And that is exactly what WTW is doing.
If you’re a Zenith Trading Circle subscriber, you can get my detailed recommendation for WTW here. Those trades, of course, don’t go outside our circle. Regardless, you should avoid WTW like the plague, and if I were you, I would definitely consider purchasing a few puts.
Here’s Why These Garbage Stocks Can’t Go Up for Much Longer
Markets celebrated another lousy jobs report last week, thankfully the last of the Obama presidency. The US economy, home to 320 million people, managed to squeeze out a mere 156,000 jobs in December, a fittingly pathetic end to eight years of growth suppressing policies. With a record 95.1 people out of the labor force, the fake news unemployment rate was 4.7% but the real unemployment rate was closer to 10% and if you include both long-term and short-term discouraged workers over 20%. But you won’t read that in The New York Times or, for that matter, even in The Wall Street Journal because our financial media is economically illiterate.
Bond yields dropped pretty sharply last week with the yield on the benchmark 10-year Treasury falling back to 2.42%. But 3-month Libor, which is used to price many financial instruments around the world including corporate bank debt, moved over 1% for the first time since the financial crisis. The US Dollar Index ended the week down slightly at 102.2 after trading as high as 104 at one point. The trend for higher rates and a stronger dollar remains intact and will put pressure on corporate earnings in the year ahead.
The question is how long the market can rally in the face of consistent economic weakness with the Federal Reserve now pushing rates higher (even at a painstakingly slow rate). US GDP growth is likely to finish up at only around 1.7%, a very weak number. Further, industrial capacity utilization is only 75% (below 76% is considered contractionary) and over previous Fed interest rate hike cycles it was between 80-81%. The Fed hasn’t raised rates in the past when capacity utilization was below 80%, suggesting at the very least that the Fed’s own forecast of 3 more hikes in 2017 is highly unlikely to materialize.
And market valuations continue to run ahead of corporate performance. Factset estimates S&P 500 non-GAAP (fake) earnings growth in 2016 of only 0.1% (GAAP-earnings (real) growth is sharply negative). Revenues are forecast to be up 2.2% on a nominal basis which equates to no growth on a real (i.e. inflation-adjusted) basis. In 2015, S&P 500 earnings declined year-over-year. Investors continue to demonstrate an amazing ability to ignore the facts, but before they had the Fed at their backs. Now the Fed is slowly tightening the noose of monetary policy, and interest rates are up sharply since the election and will start impacting earnings and other important economic activity like housing very soon.
Data shows that sentiment rather than fundamentals is driving the markets. The Investors Intelligence reading jumped over 60% bullish last week, which it only does 1.8% of the time. And when it reaches such extremes, stocks often sell off sharply shortly afterward. The latest Market Vane Bullish Consensus came in at 65% bullish and the Consensus Index bullish sentiment is currently at 72% bullish. The CBOE Volatility Index (VIX), the so-called fear gauge, is scraping along the bottom of its historical range at 11.32 (its 52-week range was 10.93/32.09). It’s one thing to be happy that we can now look forward to pro-growth economic policies, but investors are getting ahead of themselves. There are going to be a bunch of parties in Washington, DC on January 20, but I don’t expect Wall Street to party hardy for too much longer.
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