A “Sacred Number”
Did you see?! Did you see?!
The Dow Jones Industrial Average closed above 30,000 yesterday for the first time ever!
How could you not see it? It’s pretty much the only thing that every single financial rag and talking head can think about lately.
Even President Donald Trump came out of hibernation to comment on the occasion, calling Dow 30,000 a “sacred number.”
I’m not sure I would call it “sacred.” The Holy Hand Grenade of Antioch … now that’s sacred. But Dow 30,000? Is it really the holiest of holies?
Well, it depends. If you’re into technical analysis with all its shapes, trendlines and patterns, this is a pretty significant development. In fact, it’s a big enough deal that technical investors may start to come out of the woodwork to buy more than they have in the past.
Furthermore, Dow 30,000 is also a big deal for sentiment analysis.
As the name implies, sentiment analysis is based on the overall feelings or attitudes of investors. Think of it as market psychology. Breaking through a big number like 30,000 has a large sentiment impact.
As I’ve said before, people love round numbers. They’re pretty. They make math easy. And they’re easy targets to set and forget for buy and sell orders.
But there’s one branch of market analysis that can’t care squat about Dow 30,000. That’s the fundamental analysis crowd. You know, the guys like Banyan Hill’s own Ted Bauman, who look at a company’s earnings, financials, price-to-earnings ratios and debt loads.
To these investors, Dow 30,000 might as well be just another pretty number when it comes to a company’s financial statements.
“In my view, it is far more interesting to compare the price of an index to the fundamental characteristics (earnings, sales, book value) of the companies within it,” said Brian Levitt, a global market strategist at Invesco.
Levitt went on to point out that when the Dow first hit 10,000 in 1999, it traded at roughly 30 times the average earnings per share of the 30 Dow component companies. In 2009, when the Dow hit 10,000 again, it traded at 12 times earnings. On Monday, the Dow traded at 29 times earnings.
Those keeping score at home know the Dow went on to rally about 1.5% more after hitting 10,000 in 1999 before the bottom fell out. Meanwhile, in 2009, the Dow went on to drop another 3.37% before it finally bottomed out after revisiting 10,000.
The situation now is nothing like either 1999 or 2009. We’re in some kind of weird hybrid. After all, it’s 2020 — you didn’t expect this to be simple, did you?
In 1999, we had irrational exuberance and a dot-com bubble. In 2009, we had fear and systemic banking issues. In 2020, we have a global pandemic and boatloads of Federal Reserve stimulus. We also have a transition to a new U.S. government underway and a vaccine just around the corner.
The hope is that this combination will smooth out the growing wrinkles in the U.S. economy and kick-start a rapid growth period as the nation recovers. There will be bumps along the way, sure. But the outlook is getting better by the day.
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The Good: Perfect Strangers
HP Inc. (NYSE: HPQ) and Dell Technologies Inc. (NYSE: DELL) are standing tall on the wings of their dreams!
From remote working to distance learning, HP and Dell cleaned up last quarter. Both PC makers topped Wall Street’s earnings and revenue forecasts.
HP earned $0.62 per share on sales of $15.26 billion, while Dell banked $2.03 per share on revenue of $23.48 billion.
Taking a closer look, Dell saw consumer sales rise 47% and business sales spike 62%.
HP, meanwhile, said laptop sales gained 18%, desktop sales fell 28% and workstation sales plummeted 45%.
Despite the strong numbers, analysts expressed concerns that this pandemic-driven growth wouldn’t last.
But HP CEO Enrique Lores wasn’t having it: “Our results give us great confidence in our ability to drive long-term growth and shareholder value in 2021 and beyond.”
That said, one of these two stocks rallied today, and one didn’t. I bet you can’t guess which one…
It’s HP.
HP? Mr. Great Stuff … don’t be ridiculous!
So why, despite weaker revenue, sales and unit growth, did HP stock rally? Because the company announced a 10% dividend increase. And Wall Street was all like: “A 10% dividend increase? Say no more! Let’s forget our concerns about slowing growth and buy!”
If you want my take, my money would be on Dell long-term. In my experience, it just makes better products. It’s why sales were up across the board last quarter. But you do you, Wall Street.
The Bad: Ware, Oh Ware Are You Tonight?
Why did you leave me here all alone? I searched the enterprise world over and thought I’d found true love. You met a cloud provider and Phht! you was gone.
Virtual-computing services provider VMware Inc. (NYSE: VMW) has trouble adjusting to the new world in the cloud. It’s understandable.
VMware was virtualization before the cloud made it mainstream. Its products essentially replicate cloud services in house.
But in-house is so blasé these days. To its credit, VMware is moving that direction … but not as fast as Wall Street would like.
In last night’s quarterly report, VMware announced that earnings rose 17% to $1.66 per share as revenue gained 8% to $2.86 billion. Both figures topped Wall Street’s expectations.
VMware even lifted 2021’s revenue guidance to $11.7 billion, compared to the consensus estimate for $11.62 billion.
So, where’s the problem? On-premise license revenue — you know, that old enterprise in-house stuff VMware did before the cloud took over? Yeah, it’s still around. While cloud subscription revenue overtook in-house revenue for the first time last quarter, it still wasn’t enough to satisfy the nitpickers on Wall Street.
As long as the pandemic continues to force lockdowns around the globe, VMware’s in-house division will suffer. The company needs to quicken its online transition, but that’ll cost some dough over the short term. And investors don’t like that one bit.
The Ugly: Fell Into the Gap
The Gap Inc. (NYSE: GPS) fell into itself today.
No, we’re not talking self-introspection, conversations with the Dalai Lama or any new age stuff here.
GPS just dropped off a cliff. And once again, it was all about expectations.
Gap’s third-quarter report was a mixed bag. Revenue of $3.99 billion beat expectations for $3.82 billion in sales.
But earnings came in at $0.25 per share — below Wall Street’s target for $0.32.
Gap also neglected to provide fourth-quarter guidance and only stated that it expects results to be in line with or better than 2019.
Yes, there are problems on the surface, but they get worse as you dig deeper. For instance, revenue at the company’s Old Navy and Athleta stores rose 15% and 35% year over year, respectively. But Gap and Banana Republic revenues fell 5% and 30%, respectively.
Additionally, Gap’s sales growth slowed across the board — both online and in-store. Analysts now project holiday sales growth of a mere 1.5%. After GPS’s blistering 285% rally off the March bottom, investors clearly expected more.
Any further indications of slowing sales could shake loose the remaining GPS bulls in spectacular fashion. If you hold GPS, taking profits might not be a bad idea right now.
Tomorrow is Thanksgiving!
That means Great Stuff is going on holiday to spend time with family. You’ll still get Thanksgiving greetings from us tomorrow because we care. We really do!
And you’ll get a little something special on Friday as well. The market’s only open half the day on Friday, and Great Stuff doesn’t deal with half-a**ed trading. So … we’re taking that day off as well.
In the meantime, are you ready to stuff yourself silly and socially distance with family via Zoom? Just remember, no matter how realistic grandma is on the screen, don’t try to pass the gravy boat. You’re gonna have a bad time.
While you can’t tell from the friendly banter, this week’s poll is extremely serious in nature. Families have ended over this single question, and we here at Great Stuff do not take it lightly.
So, without any further ado:
Now, Great Ones, I asked my grandfather this same question 30 years ago. He looked at me and said: “Kid, we don’t like your kind! I’m gonna send your fingerprints off to Washington!”
And, Great Ones, somewhere in Washington, enshrined in some little folder, is a study in black and white of my fingerprints.
And the only reason I’m telling you this today is ’cause you may know somebody in a similar situation. Or you may be in a similar situation, and if you’re in a situation like that, there’s only two things you can do…
The first is to walk into the shrink wherever you are, just walk in, say: “Shrink, you can get anything you want at Alice’s Restaurant,” and walk out.
The second thing you can do is share today’s issue of Great Stuff with Facebook or Twitter. Can you imagine sharing Great Stuff on Facebook and Twitter, singin’ a bar of “Alice’s Restaurant” and walkin’ out?
They may think it’s an organization!
And can you imagine 50 people a day? I said 50 people a day sharing Great Stuff and walkin’ out?!
They may think it’s a movement. And that’s what it is. The Great Stuff anti-boring-financial-e-zine movement!
And all you gotta do to join is to click here … and sing it the next time it comes around on the guitar
With feelin’.
And while you’ve got that special feelin’, why not take a moment to tell us all about it? Write to us at GreatStuffToday@BanyanHill.com and tell us all about your tryptophan-induced stock market ideas, ya jive turkey.
From all of us here at the Great Stuff team: Happy Thanksgiving! We’ll catch you on the flip side next week.
Joseph Hargett
Editor, Great Stuff