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Morning Commentary

Consumers Carrying the Day

By Charles Payne, CEO & Principal Analyst
2/21/2018 9:56 AM
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Free Money: My Take

It continues to grow, and I promise at some point, there will be a major push beyond a small town to an American experiment with universal basic income (UBI). It’s being pushed this week; in fact, there is compassion by a lot of billionaires who are willing to pay an extra one percent in taxes to supposedly fund it- of course, it means a lot of other folks will be paying more taxes, too.

The notion that government should provide some kind of basic income is an idea that goes back a long way and has been espoused by famous and infamous great thinkers.

Thomas More flirted with the idea in his classic “Utopia” published in 1516 in which he saw such a scheme as a way to reduce crime and the need for harsh punishment.

Thomas Paine wrote about “Citizen’s Dividend” to all citizens paid for by a tax on landowners.

Even conservative economists Friedrich Hayek and Milton Friedman thought the idea had merit.

Today, it is championed by Elon Musk and other Silicon Valley titans, including Chris Hughes whose new book “Fair Shot” debuted yesterday.

Hughes is currently backing an experiment in Stockton, California that aims to give randomly selected folks $500 a month as a universal basic income payment. I suspect there are other reasons Silicon Valley billionaires care so much about this than their altruistic tendencies.

We are amid technology that’s taking a lot of jobs, and some think there should be a New Deal for those displaced by artificial intelligence (AI).

Here’s the rub. People need to work for several reasons.

As for Stockton, the unemployment rate is 6.6% versus 4.1% for the nation. And more than 25% of the adults don’t even have a high school diploma – many cannot even speak English. I say if you want to help them, invest that money into skills-training programs.

That would assuage high-tech titan guilt, but it would also instill a sense of pride into folks, which is a universal goal far more enriching than a handout.

There is no such thing as free money. Moreover, taking away the notion of work and achievement isn’t compassion.

Message of Market

The selling in the Dow Jones Industrial Average underscores why a lot of professionals like to go home flat into the weekend, especially those three-day weekends. In many ways, yesterday’s sell-off began last Friday around noon at 25,418. That news was triggered by the scuttlebutt surrounding Special Counsel Mueller’s indictment announcement. 

There was relief that the news didn’t implicate the White House. There was some equilibrium, but the reaction underscored the tepid nature of the market.

The market continues to grapple with the next catalyst while speculating about the impact of all the drama in Washington, D.C. - from political intrigue and investigations to how the Federal Reserve handles America’s new growth model.

Tuesday was another wild day in the market where the headline decline masked distinct economic trends that are only getting stronger.  As seen in the hype of things, such as artificial intelligence, big data collection, and autonomous cars, they all come to fruition as demand for computer chips keeps increasing. 

Semiconductors were derailed by a single disappointing earnings release two weeks ago from Microchip Technology (MCHP), but the rest of the industry has gotten back on track.

Even this is a sub-sector of the larger macro trend of consumer demand.

While Wall Street mavens keep whining about Main Street’s windfall from tax cuts and regulatory reform, it has unleashed the American consumer. People are now acting on renewed confidence in the nation and their own financial situation.

On Friday, the University of Michigan saw headline sentiment rebound to a reading of 99.4, which crushed consensus. The 4.2 percentage point move lifted the index past the 2017 average of 96.8 as expectations surged at an even faster pace of 4.5 percentage points.

While Wall Street frets, here is a key point from that report:

Purchase plans have been transformed from the attraction of deeply discounted prices and interest rates that outweighed economic uncertainty, to being based on a sense of greater income and job security as the fewest consumers in decades mentioned the favorable impact of low prices and interest rates.

So, can consumers afford to keep shopping?  I say yes partly because household debt service payments (as a percentage of disposable income) remain near an all-time low.

This all played out in yesterday’s otherwise rough session:

Home Depot (HD) crushed it because it has the ultimate business one-two punch of pricing power and taking market share.

Even Walmart (WMT) took a drubbing because of online disappointment -the company saw its comp- store sales up 2.6%, beating consensus of 2.0%. Then there’s the ultimate consumer stock- Amazon (AMZN), which soared +$20.00.  The big percentage winner was DineEquity (DIN), parent of IHOP and Applebee’s - earnings results were okay, but management displayed great confidence in 2018.

Things are going to be much better in 2018 than in 2017…those crumbs will result in the purchase of a lot of pancakes.

Same Store Sales

2018 Guidance

2017 Actual

Applebee’s

+3.0%

-5.3%

IHOP

+3.0%

-1.9%

 

I have more details on the state of the consumer, and why I think this stock is a Buy right now for those looking to hold for one to two years. To get your free report, ask your rep, or download it here.  

Today’s Session

The futures erased a couple hundred points of decline and all the major indices are in the green.   Nasdaq is only 3% away from its all-time high.  Tech looks great and we are working on a buy list. 

The latest read on housing shows that mortgage applications declined 6.6% last week after declining 4.1% in the previous week.  Higher rates and supply constrains are adding to the pressure.  Speaking of rates, the 2-yr treasury has climbed to the highest level since September 2008 and is currently at 2.27%.  We will get existing home sales shortly.

The FOMC will release its latest minutes at 2 pm. 

 


 

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