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Strategic Insights

Volume 7, Edition 27 | August 6 - August 10, 2018

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Talking Turkey

Doug_Walters Doug Walters | Articles

Read Time: 4:30 min


U.S. stocks pulled back this week as continued strong domestic earnings were not enough to allay Turkish currency concerns…

Market Review

Contributed by Doug Walters

The S&P 500 made modest progress early this week, bumping up against the highs set in January, before pulling back Friday as Turkey’s currency struggles. Recall that a swift double-digit pullback followed the January highs in February. It has been a bumpy grind over the past five months, but strong corporate earnings have kept the wind at investors’ backs.

Signs, Signs, Everywhere are Signs

Last week we delved into the second quarter corporate earnings season (see Trillion Is the New Billion). All signs from companies are that the general economic outlook remains robust. Data watchers should not be surprised at this; GDP is up, unemployment is low, the Fed remains accommodative, yet inflation has stayed relatively tame. This is a great environment for companies and their stocks. However, the market paused on Friday as fears rose that Turkish currency challenges could impact exposed European banks.

As would be expected at this stage of the cycle, some U.S. stocks are pricing in perfection. We have recently discussed some of these names, like Netflix (NFLX) where we have begun to see some chinks in their armor. We generally recommend not getting involved in these names where the stock price is so far ahead of fundamentals. Another such name is Tesla (TSLA). This week Tesla CEO Elon Musk made news by nonchalantly tweeting, “Am considering taking Tesla private at $420. Funding secured.” The shares, which opened the day at $342, closed that day near $380. By week’s end, the stock had given most of those speculative gains back. Despite the claim of “funding secured,” investors appear to be growing skeptical. Tesla’s are impressive cars, but when it comes to investments, we prefer to own companies that can back their share price up with a reasonable path to profitability.


Tesla owners love their cars, and their shareholders love their stock. But it is not a perfect love story, as there are quite a few haters out there, particularly as it relates to the stock. According to Musk, Tesla is the most shorted stock in the history of the stock market (investors who short the stock are betting that the shares decline). The case for the short sellers is clear. Tesla stock is valued at over $60bn (more than that of Ford or GM), yet they do not make money and are burning through about $4bn of cash a year. As such, taking Tesla private will be a big gamble for whoever provides the funding. If the funding has not in fact been secured… Musk will have the SEC to answer to for his misleading tweet.

Speaking of Tesla…

“Love Song” is a power ballad written by Frank Hannon and Jeff Keith of the rock band Tesla, originally released on their 1989 album The Great Radio Controversy. The song reached number ten on the U.S. charts, becoming the group’s biggest hit to date. It also became a gold record. Soure: Wikipedia

Strategy Update

Contributed by Max Berkovich ,


Emerging Headache

The global equity markets were taken for a ride on Friday amid concerns of financial instability in Turkey. Investors fear that trouble in Turkey’s debt could be similar to the debt crisis in Greece. Both, the U.S. Dollar and U.S. Treasuries finished the week in the green as investors turned to safety. Speaking of the U.S. Dollar…

  • U.S. small capitalization stocks have been gaining traction as trade disputes between U.S. and China intensifies. Investors like the fact that small-cap companies generally reside and earn most of their revenue in the U.S., unlike their larger peers. For example, Colgate-Palmolive (CL) earns over 70% their sales internationally, while Church & Dwight’s sales come 83% from the U.S.
  • The U.S. Dollar gained over 1% this week against a basket of major currencies. The U.S. dollar is now up over 5% year-to-date against Euro, British Pound, and Australian Dollar.
  • After Friday, the Turkish Lira has declined around 60% against U.S. dollar year-to-date. Turkey’s, iShares ETF (TUR) is down over 48% this year as well.


Holding the Book

The Materials sector was the biggest laggard this week. Retail companies boosted the Consumer Discretionary space to the leading spot despite a drag from…

  • Booking Holdings Inc. (BKNG) reported gross bookings of $23.9 Billion in the 2nd quarter, and handily beat on both top and bottom line. But soft guidance sent some investors packing. While the company has a history of conservative guidance, the $36.70 to $37.70 projected by the company fell well short of consensus expectations of $39.82.


Prescription for Success

Retail exposure was responsible for a glowing week for the both consumer sectors. Financials were the laggard this week thanks to a trifecta of bad news, lower interest rates, a flatter yield curve and another sovereign country facing a debt crisis. In other strategy news…

  • CVS Health Corp. (CVS) topped expectations when it released their earnings. The company reported that prescription volume grew 9.5% over the past year. While the company’s operating results look solid, and guidance was positive, the company’s prescription for a higher stock price lies solely on its proposed $69 Billion mega-merger with Aetna, Inc. (AET) a health insurer.
Indices & Price ReturnsWeek (%)Year (%)
S&P 500 -0.26.0
S&P 400 (Mid Cap)-0.25.0
Russell 2000 (Small Cap)0.89.9
MSCI EAFE (Developed International)-1.6-4.9
MSCI Emerging Markets-1.0-8.3
S&P GSCI (Commodities)-0.93.6
MSCI U.S. REIT Index-1.6-0.7
Barclays Int Govt Credit0.3-1.8
Barclays US TIPS0.4-1.9

The Week Ahead

Contributed by

A Market Moving GEM is Not Expected

Gross Domestic Product (GDP) annual growth in the European Union is estimated to remain at around 2.1%.

  • European Union GDP annual growth has been on the decline since October.

Earnings from our Equity Income strategy holding Cisco Systems (CSCO) on Wednesday is the lone earnings report for our holdings.

  • Analysts estimate about 6% growth in sales and around 12% growth in earnings per share.
  • Investors will most likely focus on the company’s software side of the business like applications and cybersecurity. In past quarters, both printed double-digit growth.

Michigan Consumer Sentiment, Industrial Production, Retail Sales, and housing data are the scheduled economic data for the week.

  • Michigan Consumer Sentiment is expected to remain near 15-year highs.
  • Industrial Production and retail sales are estimated to expand at a slower pace in July than June.
  • Building permits and housing starts are expected to increase slightly, while mortgage applications are expected to continue the declining trend.

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