Brace Yourself For Another Wild Month In Stock Markets

For the year, the Dow is down -6%, the S&P 500 is down just over -9%, and the Nasdaq has lost -14.7%. The previous record-holder is January 2009, an ugly moment for the economy, when the stock market fell -8.6%. In addition, the VIX – aka the CBOE Volatility Index – has actually dropped back to around 31 after topping 37 earlier this week, its highest point since November 2020.

Keep in mind, the index isn’t registering anywhere close to levels reached during other periods of “extreme” volatility. For example, the index, which is measured between zero and 100, hit its highest point of almost 83 during the financial crisis in 2008. Its most extreme point during the pandemic was around 66 in March 2020. So, by comparison, this week’s volatility has been rather mild.

Federal Reserve

Some insiders equate the wild swings in stock prices to investors, particularly “big money,” trying to establish a new baseline for stock valuations minus the Fed’s easy money policies that have driven a massive amount of cash into markets since the pandemic began in 2020.

At its height, the Fed was pumping as much as +$120 billion per month into the system via its asset purchase program, ballooning its balance sheet to now nearly $9 trillion.

At the same time, the Fed has held its benchmark rate at near-zero and, before that, hadn’t even attempted to raise rates since 2018, and then only briefly. The last full-cycle of rate hikes was 2015. What’s more, investors haven’t really had to factor for inflation since the early 90s and it hasn’t been this high since the 80s.

Bottom line, whatever the new “normal” ends up looking like, it will be dramatically different from the pre-pandemic investing landscape. I’ve heard several large stock traders saying it seems to be the return of Alpha instead of the race to levered Beta. I hear others on Wall Street referencing it to a bit of league recreational youth baseball team where everybody now gets an award simply for participation, but then kids run into a rude awakening when performance really starts to matter.

It feels like we are there in the stock market; every business that was coming into the market was simply being rewarded with participation points, now people are starting to keep a real scorebook and counting the strikeouts and runs scored.

Economy still roars

The good news is that the U.S. economy continues to roar. Historically, a combination of moderate inflation and moderate interest rates has led to some of the biggest boom times for U.S. Last week, the Commerce Department said Q4 Gross Domestic Product (GDP) grew at an annualized rate of +6.9%, stronger than Q3’s +2.3% and well above Wall Street expectations of around +5.7% growth.

Consumer spending climbed at a +3.3% annual pace led by a +4.7% increase in services spending. But the real stand out was private investment which rocketed +32% higher, boosted by a surge in business inventories as companies stocked up to meet higher customer demand. Rising inventories, in fact, contributed nearly +5% to Q4 GDP growth.

On the one hand, the inventory build is positive because it indicates an easing of supply chain dislocations that should in turn help with inflation pressures. On the other hand, many economists note that the big boost from retailer and wholesaler restocking is not likely to be repeated.

Companies will also likely start to unwind at least some of that inventory in the quarters ahead, which could drag overall 2022 GDP, especially if consumer spending also drops off. And investors are more closely tracking consumer behavior as inflation continues to rise.

With consumer spending accounting for about 70% of the U.S. economy, any signs that belts are tightening or moods are getting overly pessimistic will likely set off some alarm bells.

Data to watch

Turning to next week, it will be another busy one for both key economic data as well as earnings. The main economic data highlight will be the January Employment Situation on Friday. Other key data includes ISM Manufacturing, Construction Spending, and the JOLTS report on Tuesday; ADP’s private payrolls report on Wednesday; Productivity & Costs, Factory Orders, and the ISM Non-Manufacturing Index on Thursday.

Earnings wise, results are due from NXP Semiconductor and Trane on Monday; Advanced Micro Devices, Alphabet, Amgen, Chubb, Electronic Arts, Exxon, General Motors, Gilead Sciences, Match Group, PayPal, Sirius XM, Starbucks, and UPS on Tuesday; AbbVie, Aflac, Allstate, Boston Scientific, CNH, Corteva, D.R. Horton, Ferrari, Humana, Johnson Controls, Meta (Facebook), MetLife, Novartis, Novo Nordisk, Qualcomm, Siemens, Thermo Fisher, TMobile, and Waste Management on Wednesday; Activision Blizzard, Amazon, Biogen, Carlyle Group, Check Point, Cigna, Clorox, ConocoPhillips, Deckers Outdoors, Eli Lilly, Estee Lauder, Ford, Hanesbrands, Hershey, Honeywell, Ingredion, Merck, Pinterest, Quest Diagnostics, Royal Dutch Shell, Snap, SnapOn, Wynn Resorts, and Xylem on Thursday; and BristolMyersSquibb, CBOE, Phillips 66, Regeneron, and Sanofi on Friday.

Bottom line, brace for another huge week of extreme volatility.

Clorox Forecasts Drop in Annual Sales as Ppandemic Boom Fades, Shares Fall

The company forecast fiscal 2022 sales to fall between 2% and 6%, while analysts expected a decline of 1%, according to Refinitiv IBES data.

Like Procter & Gamble Co and Britain’s Reckitt Benckiser Group Plc, Clorox had benefited from consumers stockpiling cleaning products at the height of the pandemic last year.

But with the opening up of the economy, sales in its mainstay health and wellness unit slumped 17% in the fourth quarter. The household business, which makes Glad trash bags and Kingston charcoal, reported an 8% drop in sales.

“This was a poor quarter,” said Edward Jones analyst John Boylan. He added that while the brokerage expected the first half to be difficult due to tough year-ago comparables, normalization of sales and profit would take longer than its initial estimations.

Clorox’s results also took a hit from rising costs of raw materials, such as pulp, resin and petrochemical products, that have prompted companies across sectors to increase prices.

Despite a price hike earlier in 2021, its gross margins declined by 970 basis points to 37.1%. That, in part, pulled down its adjusted earnings to 95 cents per share, which missed expectations of $1.35 per share.

Total net sales fell to $1.80 billion from $1.98 billion, falling short of estimates of $1.92 billion.

(Reporting by Mehr Bedi in Bengaluru, Additional reporting by Siddharth Cavale; Editing by Saumyadeb Chakrabarty and Aditya Soni)

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Amazon executives noted shifting consumer habits as the pandemic eases and people become more mobile. Amazon forecasted the next quarter’s sales at between $106 billion and $112 billion, compared to Wall Street expectations for right around $119 billion.

Amazon’s projections would still represent growth of +10% to +16%. Keep in mind, bears are also pointing to ongoing fears of supply chain hiccups, higher-trending inflation, and new coronavirus outbreaks. Earnings come at a busy pace again today with results from Caterpillar, Cerner, Chevron, CNH Industrial, Colgate Palmolive, Enbridge, Exxon Mobil, Johnson Control, and Procter & Gamble.

The worry on Wall Street is that this new normal rate of growth will be slower than many analysts and trading firms are forecasting coupled with higher inflation and or supply chain dislocations corporate profits could fall under some pressure or in this case be less than Wall Street is forecasting for the next few quarters. Bulls expect more consumer spending will shift from goods and pandemic-related services (delivery, video games, cloud/collaboration software) but are still betting on pent-up demand for things people missed out on during lockdowns, as well as goods and services that are currently in short supply.

Data to watch

Updated inflation data is also on tap with the ISM Manufacturing Index on Monday and the Services Index on Wednesday.

There will be plenty more earnings next week too, including Simon Properties and Zoom on Monday; Activision Blizzard, Alibaba, Amgen, Clorox, ConocoPhillips, Eli Lilly, Fidelity, Match Group, Monster Beverage, Occidental Petroleum, and Phillips 66 on Tuesday; Allstate, CVS, Etsy, General Motors, Kraft Heinz, Marathon Petroleum, MetLife, MGM Resorts, Rocket Companies, Roku, Trane, and Uber on Wednesday; Adidas, AMC, Carvana, Cigna, Cloudflare, Corteva, Duke Energy, Kellogg, Moderna, Nintendo, Novo Nordisk, Siemens, Square, Wayfair, Zillow, and Zoetis on Thursday; and Dish Network, Dominion Energy, and DraftKings on Friday.

Insider Accumulation

ES ##-## (Daily) 2021_08_01 (19_25_02)

I have mixed feelings about SP500. There are a few signs of weakness. However, it might be the result of low summer activity. Advance-Decline Line is clearly bearish. Insider Accumulation is also not that strong. Moreover, the Volatility Index is very low and potentially it could bring a pullback. In any case, SP500 futures failed to close the week above Gann resistance. And that is also a negative sign.

The Federal Reserve policy is still supportive. But keep in mind, that SP500 has rallied around 100% since the pandemic bottom without any pullback. And the retest of key support zones near 4200 and 4000 is realistic.

On the other hand, the continuation of the rally is also possible but only if price sustains above 4400. If that happens, bulls will target 4500 and 4600 in extension.

Clorox Shares Jump About 6% After Strong Earnings; Target Price $256

Clorox reported its net sales surged 27% in the first quarter of FY2021, the strongest in more than two decades, including double-digit growth across all major business units as people spent more time cleaning and disinfecting their homes due to the COVID-19 pandemic, sending its shares up about 6% on Monday.

The $9 billion market cap consumer products company delivered $3.22 diluted EPS, compared to $1.59 diluted EPS in the year-ago quarter, representing a 103% increase. That was also higher than the market expectations of $2.32 per share. Net sales registered 27% to $1.92 billion – the biggest quarterly jump since 1998.

Diluted EPS results reflect higher sales, gross margin expansion and a one-time non-cash gain from the remeasurement of the company’s previously held investment in its Saudi joint venture. Excluding the impact of the acquisition, EPS grew 66%.

Clorox forecasts full-year sales to grow between 5% to 9% and earnings per share to grow between 5% and 8% to $7.70 to $7.95 per share.

At the time of writing, Clorox shares traded 5.61% higher at $219.0 on Monday; the stock is up over 50% so far this year.

Executive Comments

“We delivered another quarter of outstanding results to have a strong start to the fiscal year, with broad-based strength across our portfolio, driving double-digit sales growth in all reportable segments,” said CEO Linda Rendle.

“Our priority remains maximizing the supply of our products — leveraging all available resources to help ensure people can access what they need — and continuing to play 100% offense on all our businesses, with a focus on delivering value and innovation that allows us to convert new users to loyal consumers,” Rendle added.

Clorox Stock Price Forecast

Eight equity analysts forecast the average price in 12 months at $222.63 with a high forecast of $263.00 and a low forecast of $189.00. The average price target represents a 2.12% increase from the last price of $218.00. From those eight analysts, one rated “Buy”, five rated “Hold” and two rated “Sell”, according to Tipranks.

Morgan Stanley gave the base target price of $197 with a high of $261 under a bull-case scenario and $146 under the worst-case scenario. The firm currently has an “Underweight” rating on the consumer products company’s stock. Citigroup boosted their price objective on Clorox to $246 from $206 and gave the stock a “neutral” rating in August.

Several other analysts have also recently commented on the stock. JP Morgan lowered Clorox from an “overweight” rating to a “neutral” rating and set a $235 price target for the company. The investment bank said the move was a valuation call. Deutsche Bank boosted their price target to $223 from $174 and gave the stock a “hold” rating in July. At last, Zacks Investment Research lowered to a “hold” rating from a “buy” and set a $249 price target.

We think it is good to buy at the current level with a target of $256 as 100-day Moving Average and 100-200-day MACD Oscillator signal a mild buying opportunity.

Analyst Comments

“Structural Long-term Topline Challenges Relative to HPC Peers: While Clorox’s (CLX) near-term topline is likely to be robustly supported by a COVID-related demand boost for cleaning products (FY20 organic growth of 10%, driven by the 25% of CLX’s business related to cleaning), we believe that longer-term, Clorox remains over-indexed to low-growth product categories, with high exposure to the US,” said Dara Mohsenian, equity analyst at Morgan Stanley.

“Valuation Too High: We view CLX valuation of ~20.3x CY21e EV/EBITDA and ~31x CY21e P/E as too high (in comparison to PG at ~23.5x CY21e P/E) considering limited LT EPS growth and strategic potential relative to peers post a beneficial COVID impact,” Mohsenian added.

Check out FX Empire’s earnings calendar

Clorox Sales Up 22% in June Quarter Amid COVID-19 Panic-Buying; Target Price $256

Clorox, a $9 billion market cap consumer products company, reported that its sales surged 22% in the June quarter, including double-digit growth across all reportable segments as people spent more time cleaning and disinfecting their homes due to the COVID-19 pandemic, sending its shares up over 1% pre-market trading.

Clorox said it delivered earnings of $310 million, or $2.41 diluted EPS in the fourth quarter, which ended June 30, 2020, compared to $241 million, or $1.88 diluted EPS, the same quarter a year earlier, representing a 28% increase in diluted earnings per share. The company’s fourth-quarter gross margin increased 170 basis points to 46.8% from 45.1% in the year-ago quarter.

The board of directors of the Clorox Company also announced that, effective Sept. 14, 2020, Linda Rendle will be promoted to chief executive officer and elected to the company’s board of directors. Benno Dorer will continue serving as the board’s executive chair.

Clorox shares closed 2.27% higher at $236.51 on Friday, increased more than 50% since the beginning of 2020.

Clorox stock forecast

Nine analysts forecast the average price in 12 months at $202.89 with a high forecast of $256.00 and a low forecast of $164.00. The average price target represents a -14.22% decrease from the last price of $236.51. From those nine, three analysts rated ‘Buy’, four analysts rated ‘Hold’ and three rated ‘Sell’, according to Tipranks.

Morgan Stanley target price is $193 with a high of $259 under a bull scenario and $145 under the worst-case scenario. Deutsche Bank raised its target price to $223 from $174. Several other equity analysts have also updated their stock outlook. Clorox had its price target raised by investment analysts at JPMorgan Chase & Co. to $235 from $203. BofA Global Research raised price objective to $235 from $215.

We think it is good to buy at the current level with a target of $256 as 100-day Moving Average and 100-200-day MACD Oscillator signal a mild buying opportunity.

Analyst comment

“Structural Long-term Topline Challenges Relative to HPC Peers: While CLX’s near-term topline is likely to be robustly supported by a COVID-related demand boost for cleaning products (we project +17.5% for 2H20e, driven by the 25% of CLX’s business related to cleaning), we believe that longer-term, Clorox remains over-indexed to low-growth product categories, with high exposure to the US,” said Dara Mohsenian, equity analyst at Morgan Stanley.

“Valuation Too High: We view CLX valuation of 20.5x CY21e EV/EBITDA and 30x CY21e P/E as too high (in comparison to PG at 23x CY21e P/E) considering limited LT EPS growth and strategic potential relative to peers post a beneficial COVID impact,” he added.

Upside and Downside Risks

Topline and margin upside from improved pricing, longer-lasting COVID-related demand impact, better than expected volume, declining commodity costs, successful innovation driving recaptured shelf space, consolidation potential, and cost-cutting, Morgan Stanley highlighted as upside risks to Clorox.

Pricing doesn’t take hold, worsening volumes, higher than expected commodity inflation, heightened competition from private label, Morgan Stanley highlighted as downside risks.