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Weekly Market Report - December 18-22, 2017

26 Dec 2017 5:45 PM | Jocelyn dela Dingco (Administrator)

THE GENERAL MARKET

GOP Tax Bill Signed Into Law

The week culminated with U.S. President Donald Trump signing the Republican tax bill on Friday. It marked his first major legislative triumph since he assumed the presidency in January this year.


 

The enacted bill overhauls the tax code for individuals and businesses, eliminates the Affordable Care Act's so-called individual mandate, and opens parts of Alaska up to oil drilling. Trump fulfilled his pledge to sign the bill before Christmas.

 

The Republican-led legislative branch of the U.S. government finally succeeded in sealing Trump’s first major legislative victory after the final approval (224-201) on Wednesday at the House of Representatives. The Republicans in the Senate also won 51-48 in favor of a sweeping $1.5 trillion tax bill.

Many prime companies welcomed the tax reform bill’s approval. Immediately following Congress’ approval, AT&T (T) announced its intention to increase capital spending in the United States by $1billion in 2018. The company also promised to grant a $1,000 special bonus to more than 200,000 of their domestic employees. If U.S. President Donald Trump signs the bill before Christmas, the bonuses will be paid out to the employees during the holiday season.

 
Trump gave special mention and praised Boeing Co. (BA), Comcast Corp. (CMCSA) and Wells Fargo & Co. (WFC) because they all pledged to offer employees bonuses and increased wages, if permitted, after the passing of the tax bill.
 

The U.S. tax overhaul is coming in as a windfall to Silicon Valley technology companies like Alphabet Inc. (GOOGL) and Apple Inc. (AAPL). Both companies will enjoy big tax cuts and the window to bring back billions of dollars from overseas at a reduced rate.


YTD PERFORMANCE OF THE THREE MAIN INDEX


S&P 500 2,683.34 as of 12/22/2017 (+19.85% YTD)

Last week’s close: 2,675.81

The S&P 500, the U.S. stock market benchmark, also finished on its own record high of 2,690.16 on Monday which is its ninth straight monthly rise and the longest since April 1983. The index is likewise on track to post positive monthly returns, including dividends, for all 12 months of 2017.

Dow Jones Industrial Average 24,754.06 as of 12/22/2017 (+25.26% YTD)

Last week’s close: 24,651.74

The Dow Jones Industrial Average was knocking on the door of the 25,000 mark earlier this week and posted its highest closing record of 24,792.20 on December 18.

The blue-chip index has set 86 new record closing highs since the Trump won the 2016 presidential elections. Investors were confident then that the president-elect would pass business-friendly legislation and other job-boosting measures.  its 70th record close of 2017 to break a calendar-year record that’s stood since 1995, is on track to log its longest streak of monthly gains in nearly 59 years.

Nasdaq Composite Index 6,959.96 as of 12/22/2017 (+29.29% YTD)

Last week’s close: 6,936.58

The Nasdaq Composite briefly surpassed the 7,000-point mark for the first time in mid-day trading on Monday before closing slightly under that milestone.

Monday’s closing of 6,994.76 was also a record-high. The tech-heavy index had the largest percentage gain on Monday (0.8%, or 58 points) among the three major indices.

 

Reversal of Fortune – Bitcoin Loses One-Third of Its Value

After starting the week strong and closing at a record high, the biggest and best-known cryptocurrency lost one-third of its value on Friday. Bitcoin suffered its worst setback in just five days after a blistering ascent to a peak close to $20,000 last Sunday.

The digital currency plunged as much as 30% before cutting losses, as this week’s selloff extended to a fourth day. The weekly decline is the biggest in almost 3 years. Other cryptocurrencies tumbled as well: ethereum dropped as much as 36% while litecoin slumped as much as 43% according to composite prices on Bloomberg.


CONSUMER STAPLES SECTOR HIGHLIGHTS



American Food Giants are going for a Snacking Overload

Campbell Soup Co. (CPB) / Snyder’s-Lance Inc. (LNCE)

A big moment for the food industry on Monday is the news that Campbell Soup Co. would acquire Snyder’s- Lance for about $5 billion. The latter is home to who’s who of snack brands, including Snyder’s of Hanover, Cape Cod, Kettle, Lance, Pop Secret, and Late July.

Adding Cape Cod potato chips, Snyder’s pretzels and Pop Secret popcorn to its portfolio would in effect reignite Campbell’s sales with salty snacks. With Snyder’s- Lance beefing up their snack department, the snacks would comprise nearly 50% of Campbell Co.’s net sales. Their softer soup business would fall to about a quarter of the business.

The acquisition is an attempt to bring back growth since Campbell is experiencing a three-year slump due to declining soup sales. With its $2.2 billion in sales over the last 12 months, the addition of Snyder’s-Lance would result to more than $10 billion in revenue.

In stark contrast to Campbell Soup Co., the stock of Snyder’s-Lance is performing better on a year-to-date basis. LNCE spiked by 6.94% on Monday when news of the deal broke out. Trading volume jumped by 245.82% from the previous Friday.

The Hershey Co. (HSY) / Amplify Snack Brands, Inc. (BETR)

The iconic American confectionary company is looking beyond chocolate and adding “better-for-you” snacks as consumers are seeking healthier foods. Hershey Chief Michele Buck said on Monday, when the deal was announced, that there is “seriousness and intent” to transform the100-year-old company to an innovative snacking powerhouse.

In addition to SkinnyPop popcorn, other savory snacks that are included in the deal are Oatmega, Paqui, and Tyrells.  Krave jerky and BarkTHINS are the recent acquisitions by Hershey. With more Amplify food products, Hershey will have a strong foothold in the snacking sector.

The candy bar giant will benefit from the SkinnyPop which prides itself on using no artificial ingredients, flavors, or preservatives. The on-the-go healthy snack brand had double-digit percentage sales growth in recent years.

The deal would be worth $1.6 billion where Amplify’s equity value was placed at $12 per share. The acquisition will boost the overall growth profile of Hershey by 0.5%. That is already significant given the current state of the packaged food business. Also, the deal would add 5% to Hershey’s total sales.


TRANSPORTATION SECTOR HIGHLIGHTS


Bright Prospects for 3 Shipping Stocks in 2018



XPO Logistics Inc. (XPO)


Three shipping stocks have bright prospects in 2018 but XPO Logistics has the greatest potential of all three names. In terms of market cap, XPO’sis less than $10 billion. That is about one-sixth the size of FedEx and one-tenth the size of UPS. However, the company has about 10,000 contracts with owner-operators who deliver packages to its customers.
XPO shot up 14.38% to close higher at $90.01 on Friday. The stock of this logistics company has been an outstanding performer in 2017.

 

XPO generated interest on Friday because of the news that Home Depot Inc. (HD) has not lost its desire to buy the $9 billion transportation and logistics company.

 

According to a Recode report, Home Depot believes Amazon.com Inc. (AMZN) was also considering making an offer to purchase XPO, which specializes in shipping and delivering big, bulky packages. Home Depot wants to prevent AMZN from snatching up XPO first. Home Depot refused to comment on the acquisition rumors.


The decided advantage of XPO is taking over the market FedEx and UPS won’t touch. The company has begun shipping big ticket items like 70-inch TVs for the last mile.


FedEx Corporation (FDX)

FedEx Corp. presented its fiscal second quarter that ended Nov. 30 after the close on Tuesday. The numbers were solid, beating earnings estimates handily. The company also raised full-year earnings-per-share guidance from a range of $12 to $12.80 to a range of $12.70 to $13.30.

 

FedEx cited major factors that contributed to an impressive quarter – strong demand trends, improving global economy and its own execution for its increased guidance.

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On Wednesday, FDX climbed 3.51% to an all-time high of $251.07. Actually, the stock traded at all-time high numbers in after-hours trading Tuesday night. FDX finished the week at $250.02.

The shipping giant sees a potential increase in annual profits by nearly $1.5 billion when the tax bill is signed into law. The blue-chip company is poised to achieve that now that the tax legislation has been enacted into law.

 

FedEx told investors that the increase will be triggered by the change in valuating deferred tax liabilities as well as the cut in the corporate tax rate to 21%. The company added that the lower tax rate on a stand-alone basis will push earnings higher by $1 a share.

United Parcel Service Inc. (UPS)

The stock price of United Parcel was steady during week, maintaining the $118.00 - $119.00 level. UPS closed the week at $118.64. UPS might not be as successful as FedEx in terms of earnings and hasn't had an impressive run recently, but the future is still looking good. The company is due to present its earnings report on January 25, 2018.

 

On Tuesday, UPS announced an order for 125 electric semi-tractor trailers from Tesla Inc. (TSLA) to add to its delivery fleet. Thus, Tesla secured its largest order for its recently unveiled electric trucks. UPS is now one of Tesla’s high-profile semi-tractor trailers customers. The others are Wal-Mart Stores (WMT) and PepsiCo. (PEP).

 

UPS senior director for automotive maintenance Scott Phillippi says they have high expectations and are very optimistic that this will be a good product and Tesla will provide them firm support. UPS will be evaluating the performance of the Tesla vehicles as part of thier push to transition more to alternative-fuel vehicles.


RETAIL TRADE SECTOR HIGHLIGHTS



Amazon is going for Home Security

Amazon.com Inc. (AMZN)

Amazon is really targeting to get inside the homes of their customers. After the recent launching of its new Amazon Key delivery service involving automatic locks and security cameras, Amazon has acquired the startup Blink, which specializes in much the same products.

 

The acquisition will improve Amazon's existing plugged in options because Blink's products work wirelessly. That will make the difference. The shift could be big since Amazon's existing system is limited by the need to have outlets posted near the doors and the set-up is not ideal. Although Blink's system needs batteries, you can buy them at a local store.

 

Blink was acquired only a few days after they introduced their new video doorbell. The innovative ringer operates on two AA batteries and could last for a couple of years under normal conditions. Price-wise, Blink devices cost less than compared to the battery-powered doorbell of rivals like Ring. This new device only costs $100 while offering many of the same options.

 

Amazon is aware that customers love home security cameras and monitoring systems. Blink will continue to operate under the Amazon umbrella selling and supporting the same great home security products. It’s Day 1 for Blink at Amazon but they’re looking forward to deliver more useful products to customers.

 

Shares of Amazon.com Inc. dropped this week after starting strong at $1,190.58 on Monday. It went downhill in the next four trading sessions and finished the week at $1,168.36.


THE WEEK AHEAD

Wall Street takes a break on Christmas Day and resumes the next day for the last trading days of the year. Reports on consumer confidence and pending home sales will be released on Wednesday.

 

The sweeping reform to the U.S. tax system that was signed by U.S. President Donald Trump into law on Friday will take effect on January 1, 2018. Most of the provisions for individuals are set to expire after 2025. Among the highlights of the bill include reduced individual income-tax rates, an increased standard deduction/child tax credit, and a substantial reduction in the corporate tax rate.

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One implication of the tax bill to the market is the return of volatility. The optimism over the passing of the tax-reform bill somehow suppressed stock market volatility recently as investors looked past risk factors. Since September, market volatility has been 30% below the average of the last three years. The volatility index (VIX) even hit an all-time low in November. The largest dip in the stock market in 2017 has been 2.8%. This year is the market's first year without a 3% decline. Investors are cautioned to prepare.


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