KKR to Sell its Epicor Software to Clayton, Dubilier & Rice for $4.7 Billion; Target Price $40

KKR & Co Inc, an American global investment company that manages multiple alternative asset classes, said it will sell its software business Epicor Software Corporation to Clayton, Dubilier & Rice in a $4.7 billion deal announced on Monday.

CD&R Operating Partner Jeff Hawn will serve as Chairman of the Epicor Board upon close of the transaction, expected later this year, the company said.

UBS Investment Bank is acting as financial advisor and Debevoise & Plimpton LLP as legal advisor to CD&R. Barclays is acting as lead financial advisor, BofA Securities and Jefferies LLC as financial advisors, and Simpson Thacher & Bartlett LLP as legal advisor to KKR and Epicor.

KKR shares closed 0.32% higher at $34.93 on Friday, the stock is up about 20% so far this year.

Executive comments

“Four years ago, we embarked on an ambitious product modernization journey together with Epicor and are incredibly proud of the successes that the company has achieved to date, particularly with its recent cloud releases,” remarked John Park, Chairman of the Epicor Board and Head of Americas Technology Private Equity at KKR.

“We are confident that CD&R will provide valuable support as the company continues these product- and customer- centric investments to accelerate growth in the cloud.”

KKR stock forecast

Twelve analysts forecast the average price in 12 months at $39.96 with a high forecast of $47.50 and a low forecast of $36.00. The average price target represents a 14.40% increase from the last price of $34.93. From those 12 analysts, nine rated “Buy”, three rated “Hold” and none rated “Sell”, according to Tipranks.

Morgan Stanley gave a target price of $37 with a high of $63 under a bull-case scenario and $16 under the worst-case scenario. KKR & Co Inc had its price objective boosted by stock analysts at Credit Suisse Group to $38 from $34. The firm currently has a “neutral” rating on the asset manager’s stock.

Other equity analysts also recently updated their stock outlook. Oppenheimer lowered the price target to $39 from $40, BMO raised their price objective to $46 from $44, Citigroup upped their price forecast to $47.5 from $40, Wells Fargo increased their stock price target to $43 from $40 and KBW raised it to $43 from $41. Bank of America upped their target price to $40 from $36 and gave the stock a “buy” rating. At last, Keefe, Bruyette & Woods upped their target price to $41 from $34.

We think it is good to buy at the current level and target $40 as 50-day Moving Average and 100-200-day MACD Oscillator signals a strong buying opportunity.

Analyst view

“While we see an attractive organic asset growth trajectory, we also see a recessionary backdrop that raises the risk to KKR’s fee-related earnings growth story if fundraising slows, transaction fees stall, and costs don’t flex as performance fees and investment income decline,” said Michael Cyprys, equity analyst at Morgan Stanley.

“Recessionary backdrop raises the risk of balance sheet marks and limited book value growth that could dampen prior ROE generation of mid-teens to 20%+. C-corp structure (as of July 1, 2018 ) with no K-1s should help expand the investor base over time,” he added.

Upside and Downside risks

Upside: 1) Faster deployment with greater opportunity set. 2) Accelerated portfolio exit activity. 3) Stronger fundraising boosted by seeding of new strategies. 4) Better balance sheet marks than feared – highlighted Morgan Stanley.

Downside: 1) Deeper recession that leads to weaker investment returns, balance sheet markdowns and delays harvesting of investments pressuring earnings. 2) Increased political and regulatory scrutiny of PE business model.

U.S. Stocks Mixed As Traders Wait For Additional Catalysts

A Busy Week Ahead

S&P 500 futures are little changed in premarket trading as traders prepare for a busy week that will be full of important economic reports.

On Tuesday, traders will digest Manufacturing PMI data for August. Manufacturing PMI is expected to increase from 50.9 to 53.6. On Wednesday, market participants will focus on ADP Employment Change report which is projected to show that 900,000 jobs were created in the private sector.

The end of the week will bring the most important employment reports, including Initial Jobless Claims on Thursday and Non Farm Payrolls on Friday.

Initial Jobless Claims are expected to stay near the 1 million mark while Non Farm Payrolls are projected to decline to 1.4 million.

The upcoming U.S. employment reports will test the recent market upside which is based on the assumption that the current economic recovery is robust.

Oil Moves Higher As Abu Dhabi National Oil Company Cuts Supplies In October

Hurricane Laura did not deal significant damage to oil infrastructure but oil received another bullish catalyst. Abu Dhabi National Oil Company has notified its clients that October supplies will be reduced by as much as 30%.

The main reason for this reduction is the necessity to stay in line with the OPEC+ production cut agreement.

While United Arab Emirates were not seen as a major laggard among the participants of the deal, OPEC+ leadership continues to push for full compliance from all countries which is bullish for the oil market.

Additional oil price upside may help big oil stocks like Exxon Mobil or Chevron which have recently found themselves under material pressure.

U.S. Government Bond Yields Continue To Rise

U.S. government bond yields continue their upside move which was triggered by Fed’s decision to target an average inflation of 2%. Not surprisingly, the 30-year bonds are especially sensitive to inflation threat.

This move has already prompted speculation that Fed will start buying 30-year bonds to keep yields under control. Additional asset purchases are typically bullish for the stock market.

However, it remains to be seen whether the bond market has already reached the point when the Fed is ready to intervene.

For a look at all of today’s economic events, check out our economic calendar.

Daily Gold News: Monday, August 31 – Silver Extending Advance, Gold Unchanged

The gold futures contract gained 2.19% on Friday, as it got back to last week’s short-term local high. Thursday’s Fed Chair Powell speech led to an increased intraday volatility, as gold spiked higher before the decline. Gold reversed from its new record high of $2,089.20 on August 7 after much better than expected Nonfarm Payrolls release, among other factors. The following upward correction reached a local high of $2,024.60 on August 18.

Gold is 0.1% higher this morning, as it is trading along Friday’s closing price. What about the other precious metals? Silver gained 2.83% on Friday and today it is 1.6% higher. Platinum gained 1.28% and today it is 0.7 % higher. Palladium gained 1.87% on Friday and today it’s 0.9% higher. So precious metals are gaining this morning.

Friday’s Personal Income, Personal Spending, Chicago PMI and Consumer Sentiment releases have been better than expected.

Today we won’t get any important economic data announcements. The markets will be waiting for Friday’s monthly jobs data release.

Below you will find our Gold, Silver, and Mining Stocks economic news schedule for the next two trading days:

Monday, August 31

  • 9:00 a.m. U.S. – FOMC Member Clarida Speech
  • 9:45 p.m. China – Caixin Manufacturing PMI

Tuesday, September 1

  • 12:30 a.m. Australia – Cash Rate, RBA Rate Statement
  • 3:55 a.m. Eurozone – German Final Manufacturing PMI, German Unemployment Change
  • 9:30 a.m. Canada – Manufacturing PMI
  • 9:45 a.m. U.S. – Final Manufacturing PMI
  • 10:00 a.m. U.S. – ISM Manufacturing PMI, Construction Spending m/m, ISM Manufacturing Prices
  • 9:30 p.m. Australia – GDP q/q

Thank you for reading today’s free analysis. We hope you enjoyed it. If so, we would like to invite you to sign up for our free gold newsletter. Once you sign up, you’ll also get 7-day no-obligation trial of all our premium gold services, including our Gold & Silver Trading Alerts. Sign up today!

For a look at all of today’s economic events, check out our economic calendar.

Paul Rejczak
Stock Selection Strategist
Sunshine Profits: Analysis. Care. Profits.

* * * * *

Disclaimer

All essays, research and information found above represent analyses and opinions of Paul Rejczak and Sunshine Profits’ associates only. As such, it may prove wrong and be a subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Paul Rejczak and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Rejczak is not a Registered Securities Advisor. By reading Paul Rejczak’s reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Paul Rejczak, Sunshine Profits’ employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

 

Gold Is Flagging Out – Breakout Rally Targeting $1,950 Or Higher Is Next

RESEARCH HIGHLIGHTS:

  • Gold Found Support Near $1,945- Right Where We Expected
  • Gold Setting Up A Pennant/Flag And Is Nearing The Apex
  • Another Measured Move Is Setting Up – Targeting $2250 Or Higher
  • Silver Should Rally To $36 Or Higher When Gold Breaks

Nearly every Precious Metals/Gold enthusiast that follows our work has been emailing or messaging us asking about the next rally phase for Gold.  Thank you for all of your messages and supportive comments.  If you have not been following along, please review our recent research on gold and silver price moves, the rally in platinum, and detailed 2020/2021 price forecasts for gold and silver.

After watching the VIX start to move higher last week while the S&P and Dow Jones pushed to new all-time highs, our research team has been actively studying the Pennant/Flag formation in Gold that has been setting up. Our “Measured Move” article suggests support near $1,945 will act as a launchpad for an upward price advance to levels near $2,150 or higher.  As the momentum of this upside price move continues to build, as we’ve recently seen with the last upside price leg, we believe the $2,200~$2,250 could be the next real upside price target for Gold.

Over the past few weeks, Gold has confirmed our projected $1,945 support level by closing out near this level for multiple weeks (8/10: $1.949.80, 8/17: $1,947).  We believe the ability of price to close above the $1,945 level, even though price traded below this level, shows how strong this support level really is.  Now that Gold has started to rally near the Apex of the Pennant/Flag pattern, we believe the next upside leg could be starting.

This Daily Gold Futures chart, above, highlights the extended upward price trend and the recent downward FLAG/Pennant setup – flagging out near $1945.  We believe the next upside price move could prompt a move to levels well above $2,200 to $2,250 as the momentum behind this move continues to build.

Once Gold clears $2,200 on an upside price advance, we’ll clearly be in “new high price” territory and it  will shock many investors that Gold continues to rally  in the face of the US stock market rally.  Something does not settle when one considers Gold suggesting massive fear underlies US stock market price levels near all-time highs. You may want to review our Dow Theory article to attempt to better understand what we believe is driving fear.

The Weekly Gold Futures chart below helps to pinpoint the upper price target range assuming momentum continues to build as the next breakout move takes place.  Our research team believes this next leg may push up to levels just below $2,400 before stalling out again, then likely retrace to levels near $2,250~$2,275 where another sideways/flag pattern may setup. This time, the sideways/flag setup may be very quick in terms of completing, possibly only visible on intra-day charts.

We believe the next upside price rally will have begun once Gold closes above $1,985~$1,990 (near the Flag Apex).  Get ready, this should be a very solid upside price move targeting $2,250 or higher.

Please pay attention to our research and how accurately our research team has deployed technical analysis over the past 3+ years tracking this move in Gold.  Isn’t it time you learned how I and my research team can help you find and execute better trades?  Our incredible technical analysis tools have just shown you what to expect 6+ months into the future.  Do you want to learn how to profit from these huge moves?  Sign up for my Active ETF Swing Trade Signals today!

Stay healthy, safe and strong!

Chris Vermeulen
Chief Market Strategist
Founder of Technical Traders Ltd.

NOTICE AND DISCLAIMER: Our free research does not constitute a trade recommendation or solicitation for our readers to take any action regarding this research.  It is provided for educational purposes only.

 

BlackRock Wins Regulatory Approval to Start a Mutual-Fund Business in China; Target Price $630

BlackRock, the world’s largest investment management firm, received an approval to set up a wholly-owned mutual fund unit in the world’s second-largest economy, making it the one of the first global asset management firm to win regulatory approval from the China Securities Regulatory Commission.

BlackRock got the green light late this month to start a wholly-owned subsidiary in Shanghai, the China Securities Regulatory Commission said on Friday.

The approval would extend the investment management firm’s spectra in the Chinese asset management market, where it already operates as a mutual fund venture with Bank of China and is in the process of setting up a management venture with China Construction Bank and Temasek, Reuters reported.

Last month, BlackRock reported a 20% surge in profit in Q2, largely driven by a boost in fixed income and continued momentum in cash management.

BlackRock shares closed 1.02% higher at $601 on Friday, the stock is up about 19% so far this year.

BlackRock stock forecast

Twelve analysts forecast the average price in 12 months at $632.27 with a high forecast of $685.00 and a low forecast of $566.00. The average price target represents a 5.19% increase from the last price of $601.06. From those 12 analysts, ten rated “Buy”, two rated “Hold” and none rated “Sell”, according to Tipranks.

Morgan Stanley gave a target price of $652 with a high of $985 under a bull-case scenario and $320 under the worst-case scenario. The brokerage currently has an “overweight” rating on the asset manager’s stock. Deutsche Bank also raised their target price to $568 from $566.

Other equity analysts also recently updated their stock outlook. BMO Capital Markets raised their target price on BlackRock to $620 from $560.00 and gave the company a “market perform” rating. Wells Fargo & Co raised their target price to $615 from $605 and gave the company an “overweight” rating. At last, Argus increased their price objective to $640 from $530 and gave the company a “buy” rating.

We think it is good to buy at the current level and target $630 as 50-day Moving Average and 100-200-day MACD Oscillator signals a strong buying opportunity.

Analyst view

“BlackRock seems well-poised to capitalize on opportunistic acquisitions to enhance financial performance. Also, its efforts to gain market share in the active equity business will aid profitability,” noted equity analysts at Zacks Research.

“(But) Mounting expenses (mainly owing to higher general and administration costs) are likely to hurt BlackRock’s bottom line to an extent. High dependence on overseas revenues makes us apprehensive.”

Upside and Downside risks

Upside: 1) Growth in highly scalable iShares franchise driving margin expansion and strong EPS growth. 2) Further growth in tech & high fee products such as alts, active equities, and multi-asset – highlighted by Morgan Stanley.

Downside: 1) Market share loss in ETFs; lack of positive op leverage in declining markets. 2) Worse than expected base fee pressure through pricing initiatives or mix shift. 3) Greater regulatory scrutiny; liquidity challenges in products.

European Equities: China PMIs, COVID-19, and Geopolitics in Focus

Economic Calendar:

Monday, 31st August

Spanish HICP (YoY) (Aug) Prelim

Italian CPI (MoM) (Aug) Prelim

German CPI (MoM) (Aug) Prelim

Tuesday, 1st September

Spanish Manufacturing PMI (Aug)

Italian Manufacturing PMI (Aug)

French Manufacturing PMI (Aug) Final

German Manufacturing PMI (Aug) Final

German Unemployment Change (Aug)

German Unemployment Rate (Aug)

Eurozone Manufacturing PMI (Aug) Final

Eurozone Core CPI (YoY) (Aug) Prelim

Eurozone CPI m/m (Aug) Prelim

Eurozone CPI y/y (Aug) Prelim

Eurozone Unemployment Rate (Jul)

Wednesday, 2nd September

German Retail Sales (MoM) (Jul)

Spanish Unemployment Change

Thursday, 3rd September

Spanish Services PMI (Aug)

Italian Services PMI (Aug)

French Services PMI (Aug) Final

German Services PMI (Aug) Final

Eurozone Markit Composite PMI (Aug) Final

Eurozone Services PMI (Aug) Final

Eurozone Retail Sales (MoM) (Jul)

Friday, 4th September

German Factory Orders (MoM) (Jul)

German IHS Markit Construction PMI (Aug)

The Majors

It was a bearish end to the week for the European majors on Friday, delivering a 2nd consecutive day in the red. The EuroStoxx600 fell by 0.52%, with DAX30 and CAC40 declining by 0.48 and by 0.26% respectively.

Reports of rising new COVID-19 cases across the EU weighed on the European majors on Friday. The impact of the fresh spike in new cases has been limited, however. News of progress towards a COVID-19 vaccine has limited the damage thus far.

With uncertainty over the economic outlook lingering, economic data also weighed on the majors on the day.

The Stats

It was a busy day on the Eurozone economic calendar. Key stats included German consumer sentiment and French consumer spending and 2nd quarter GDP numbers.

Prelim August inflation figures for France were also in focus on the day.

From Germany, the GfK Consumer Climate Index fell from -0.20 to -1.80 for September. According to the latest survey,

  • Income expectations saw a sharp decline, with the propensity to save on the rise suggesting a gloomy outlook on consumption.
  • The income expectations indicator slid by 5.8 points to 12.8, leaving it down by 37 points from the previous year.
  • The propensity to save indicator gained 5.5 points.
  • Economic expectations and the propensity to buy did see marginal increases, however.
  • The recent rise in new COVID-19 cases and the fear of a tightening of restrictions delivered uncertainty over what lies ahead.

From France, the economy contracted by 13.8% in the 2nd quarter, which was in line with prelim figures. Inflation figures also disappointed, with consumer prices falling by 0.1% in August.

In July, consumer spending rose by 0.5%, following a 10.3% jump in June. While continuing to rise, spending fell well short of a forecasted 2.0% rise.

From the U.S

It was a busy day on the economic calendar. Key stats included July inflation, trade, and personal spending figures. August PMI and consumer sentiment figures were also in focus.

Inflationary pressures picked up in July, with the Core PCE Price Index rising by 1.3% year-on-year. In June, the index had risen by 1.1%. Personal spending rose by 1.9%, following a 6.2% jump in June.

In contrast to the upbeat July numbers, August figures were mixed.

While the Chicago PMI fell from 51.9 to 51.2, the finalized Michigan Consumer Sentiment index was revised up from 72.8 to 74.1. In July, the index had stood at 72.5.

The stats had a limited impact on the European majors, however, which saw red whilst the NASDAQ and S&P500 hit new highs.

The Market Movers

For the DAX: It was another mixed day for the auto sector on Friday. BMW, Continental, and Volkswagen rose by 0.07%, by 0.66%, and by 0.40% respectively. Daimler slipped by 0.01% on the day.

It was a bullish day for the banks. Deutsche Bank and Commerzbank saw gains of 0.81% and 2.73% respectively.

From the CAC, it was a bullish day for the banks. BNP Paribas and Credit Agricole rallied by 3.60% and by 3.25% respectively, with Soc Gen ending the day up by 3.09%.

It was another bearish day for the French auto sector, however. Peugeot and Renault fell by 0.27% and by 0.52% respectively.

Air France-KLM rose by 0.56%, following on from Thursday’s 2.41% gain, while Airbus SE fell by 0.93%.

On the VIX Index

It was back into the red for the VIX on Friday, ending a run of 2 consecutive days in the green. Reversing a 5.16% gain from Thursday, the VIX fell by 6.17% to end the day at 22.96.

The S&P500 and Dow rose by 0.67% and by 0.57% respectively, with the NASDAQ ended the day up by 0.60%.

VIX 30/08/20 Daily Chart

The Day Ahead

It’s a relatively busy day ahead on the Eurozone economic calendar. Key stats include August prelim inflation figures for Germany, Italy, and for Spain.

We would expect the stats to have a muted impact on the majors, however.

From the early part of the day, NBS private sector PMI numbers for China will set the tone ahead of the European open.

With no material stats from the U.S to influence, COVID-19 news and geopolitics will also need monitoring on the day.

The Futures

In the futures markets, at the time of writing, the Dow was up by 84 points.

For a look at all of today’s economic events, check out our economic calendar.

Veeva Systems’ Price Target Raised to $323 with Overweight Rating, $435 in Best-Case Scenario: Morgan Stanley

Veeva Systems’, an American cloud-computing company focused on pharmaceutical and life sciences industry applications, price target was raised to $323 from $253 with Overweight stock rating, according to Morgan Stanley equity analyst Stan Zlotsky, who also said with consistent growth, profitability, and defensibility, Veeva is a unique software asset.

Late last month, Veeva reported total revenue of $353.7 million in the second quarter, up from $266.9 million one year ago, an increase of 33% year-over-year. Subscription services revenue for the second quarter were $283.5 million, up from $217.3 million one year ago, an increase of 30% year-over-year.

Veeva forecasts fiscal year ending January 31, 2021 total revenues between $1,415 and $1,420 million and fiscal third-quarter Total revenues between $360 and $362 million.

“In our new model, we raise our FY21 revenue estimates to $1,419 million (vs $1,387 million prior), within management’s updated guidance range of $1,415-1,420 million. Our FY21 revenue estimates imply YoY subscription/total revenue growth of +28.9%/+28.5% compared to +26.6%/+25.6% previously and includes ~$92.5 million of inorganic revenue from Crossix and Physician’s World (unchanged). We raise our FY21 operating margin estimates to 38.3%, versus 36.5% previously and similarly lift our FY22/FY23 margin estimates to 39.5%/40.8% from 37.6%/39.0% previously,” said Stan Zlotsky, equity analyst at Morgan Stanley.

“Our FY21/FY22 OCF estimates also increase to $544.1 million /$682.1 million from $505.8 million /$642.3 million previously. On the back of our raised estimates and improving confidence in Veeva’s FCF durability, we increase our price target to $323 from $253 previously. To arrive at our new price target, we apply a 53x multiple (vs 43x prior) or 2.5x EV/FCF/G (vs 2.2x prior) to our CY25 FCF estimate of $1,504 million ($1,357 million previously) and discount back at a 7.6% WACC (unchanged),” Zlotsky added.

Morgan Stanley target price under a bull-case scenario is $435 and $214 under the worst-case scenario. Veeva Systems had its price objective raised by equities research analysts at Truist to $320 from $222.

Several other equity analysts have also updated their stock outlook. Piper Sandler lifted their price target on Veeva Systems to $310 from $220 and gave the company an “overweight” rating. Stephens boosted their target price on Veeva Systems to $325 from $290 and gave the stock an “overweight” rating.

Twenty analysts forecast the average price in 12 months at $293.79 with a high forecast of $325.00 and a low forecast of $228.00. The average price target represents a 7.20% increase from the last price of $274.07. From those 20, 15 analysts rated ‘Buy’, five analysts rated ‘Hold’ and none rated ‘Sell’, according to Tipranks.

“Veeva’s core products provide SaaS solutions for the Life Sciences industry, targeting $10 billion+ of spend today with potential overtime to address more of the $44 billion Life Sciences spend on IT, leveraging the company’s strong brand recognition and expanding its TAM into other regulated industries and use cases. As Veeva penetrates this large TAM, we see a sustainable 18% revenue CAGR over the next 5 years,” Morgan Stanley’s Zlotsky added.

Upside risks: 1) Veeva penetrates its TAM faster than expected as it gains traction outside life sciences. 2) Traction within newer products and add-ons accelerates -highlighted by Morgan Stanley.

Downside risks: 1) 70%+ seat penetration in CRM could limit growth while declining sales headcount in Life Sciences may be a headwind. 2) TAM may be more limited due to vertical-specific focus. 3) Increased competition on CRM by competitors such as Iqvia.

Spotify On The Defensive After Mixed Quarter

Luxembourg’s Spotify Technology S.A. (SPOT) posted a fiscal Q3 2020 loss of €1.91 in July, much worse than €1.45 estimates. Revenue at the digital entertainment upstart increased 13% year-over-year to €1.89 billion, which also missed consensus expectations. Monthly Average User (MAU) statistics offered a bright spot in an otherwise bearish quarter, growing  29% year-over-year, but inline Q4 guidance gave sidelined investors no reason to jump on board.

Spotify Posts Three Quarterly Losses in 2020

The streaming service has posted losses in the last three quarters even though revenues have booked double-digit growth. In turn, this is raising doubts on Wall Street about long-term profitability. This is especially true after a pandemic wave that, theoretically at least, should have underpinned earnings-per-share expansion, due to quarantine and stay-at-home orders that gave potential customers more time to access all sorts of entertainment offerings.

Spotify filed an anti-competitive complaint against Apple Inc. (AAPL) in 2019, alleging the 30% fee demanded by the tech giant to display the app “tilted the playing field”’ by “placing unfair restrictions on marketing and promotions that benefit consumers.” Messaging app Telegram joined the complaint last month, at the same time that popular video game Fortnite was removed from the Apple Store after parent Epic Games attempted to bypass the fee. Apple Music just added global offerings that appear, at first glance, designed to punish the company for the filing.

Wall Street And Technical Outlook

Wall Street consensus rates the stock as a ‘Moderate Buy’ based upon 12 ‘Buy’, 7 ‘Hold’, and an awkward 4 ‘Sell’ recommendations. A wide range of price targets highlights broad disagreement among analysts about Spotify’s long-term outlook, with a low of $172 and a street-high $357. The stock is currently trading about $13 above the median $266 target in a placement that will make it harder to add to gains in the third quarter.

Spotify posted an all-time high at 299.67 on July 22 and sold off into the 240s in mid-August. Those extremes now mark the edges of a broad trading range that may contain price action into the fourth quarter, when investors will get another look at the company’s balance sheet. Accumulation-distribution readings haven’t budged since topping out at a new high a few days after price, reinforcing a holding pattern that reflects growing caution.

Dow Jones Utilities Breaking Trend

RESEARCH HIGHLIGHTS:

  • Dow Theory suggests indices must confirm each other and volume must confirm the trend.
  • The new downward trend in the Dow Utilities Index suggests indices are starting to break apart in terms of trending in unison.
  • Volume recently has been trailing lower, which suggests the momentum behind these new all-time highs is weakening.
  • If the Utilities Index continues to move lower and we see increased volume in the selling trend, we will consider the Dow Theory Trend component “broken” and expect a major peak/top soon after.

We know some of you are Dow Theory enthusiasts and followers.  We follow the Transportation Index as a leading indicator for potential major market trends almost exclusively because of what we have learned from Dow Theory. You can  learn more about the primary indicator in Dow Theory here. The two most important aspects of Dow Theory that we are researching today are two components:

  1. Indices Must Confirm Each Other
  2. Volume Must Confirm The Trend

My researchers and I have identified that the Dow Jones Utility Index has started to break downward in trend, breaking the recent upside price trend.  This breakdown in the Utilities Index suggests the Indices are starting to break apart in terms of trending in unison.  We have not seen increased volume in the downward trending of the Utility Index yet and we are waiting for this technical trigger to confirm the Breakdown in Dow Theory Trending by watching for the Utility Index to potentially begin a broader downside price move with increased volume.

IS DOW THEORY SIGNALING A BREAKDOWN IN TREND

Our research team is focusing on the Dow Jones Industrial Average, the Dow Jones Transportation Index, and the Dow Jones Utility Index for this article.  These three charts are key to understand the broader components of Dow Theory and how the technical and trending aspects of Dow Theory work.  We’re focusing on the Utilities Index because it is diverging from the Industrials and Transports in a big way.  We just need to see some Volume support this new downtrend in the Utilities Index to begin to raise some big RED FLAGS about a major market top setting up.

Let’s start by investigating the Dow Jones Industrial Weekly Chart, below.  We’ve highlighted the broader Head-and-Shoulders pattern in MAGENTA as well as drawn a YELLOW LINE across the UPPER GAP range from the February COVID-19 market collapse.  We believe these levels will be critical in understanding how the markets are poised to test and potentially break above these broader market resistance levels.  Additionally, we’ve drawn an upward sloping CYAN trend line that shows you how diligently price has continued to move higher since the bottom setup in March 2020.  There has been very little recent weakness in the advance of price as new highs continue to be reached.

Volume recently has been trailing lower, which suggests the momentum behind these new all-time highs is weakening.  It appears many traders are sitting on the sidelines and not participating in this upside price rally out of fear or concern that it may not be sustainable.

PRIMARY TRENDS HAVE THREE PHASES

A primary trend will pass through three phases, according to the Dow theory. In a bull market, these are the accumulation phase, the public participation (or big move) phase, and the excess phase. In a bear market, they are called the distribution phase, the public participation phase, and the panic (or despair) phase. It is quite possible that we have moved past the accumulation and public participation phases and are now firmly within the “excess phase” ..  Or what we call the “speculative phase”.

Now we will look at the Dow Jones Transportation Index, below, which is set up somewhat similar to the Industrials.  We see an extended Head-and-Shoulders pattern setup with a high price level from the Right-Shoulder acting as current resistance.  We also see a very solid upward price trend which has accelerated higher over the past 5+ weeks on diminishing volume. At this point, we should consider the Industrials and the Transports “in alignment” with one another.  The only real concern related to a weakening trend is the diminishing volume on both of these charts.

Now, we add the Dow Jones Utilities Index, below again, which sets up the entire Peaking/Topping Dow Theory technical pattern.  The first thing we see in this Dow Jones Utilities Weekly chart is that the recent price trend is moving lower. This contradicts the trends of the Industrials and Transports. Next, we see a much clearer Head-and-Shoulders pattern set up in the Utilities Index – which suggests resistance near 850 may play a big role in future price activity.  Lastly, we see diminishing volume in this recent downtrend of price – which suggests “capitulation” has yet to enter this downward price trend.

Our researchers believe the only thing missing from the Utilities breakdown, which would indicate a broader market peak is setting up, is increased  volume while the Utilities continue to trend lower.  Once this technical pattern sets up, we believe we would have enough technical confirmation of a breakdown of the Dow Theory Trend Alignment component to warn that a major market peak/top is very near (or already happened).

What this means for skilled technical traders is that you should start “hedging” against risk and considering how to protect your open long positions.  If you have not already considered how to accomplish this, we would suggest Precious Metals, Miners, Bonds and possibly small positions in Inverse ETF (such as SDS or QID).  Hedging is a very valuable tool for skilled technical traders when trends weaken or risks become more evident in the markets.  Moving capital into positions that can help protect against loss can help to balance your portfolio and reduce exposure to risk factors.

In closing, we do not have confirmation of this Dow Theory technical pattern yet. All we need to see is for the Utilities Index to continue to move lower and to see increased volume in the selling trend.  Once we see this, we’ll consider the Dow Theory Trend component “broken” and we believe a major peak/top won’t be too far away.  We suggest all of you pay close attention to these three indexes and watch for a breakdown of the primary trends in the future.  This is a great way for you to understand basic Dow Theory and the how broad market trends tend to work in “alignment” or “unison”.

Hedge accordingly.  We could be in for a wild ride in this breakdown confirms with increased volume. If you want to survive the trading over a long period of time, then you learn fairly quickly how important it is to protect against risk and to properly size your trades.  Subscribers of my Active ETF Swing Trading Newsletter can ride my coattails as I navigate these financial markets and build wealth. My research and trading team are here to help you find better trades and navigate these incredibly crazy market trends.

While most of us have active trading accounts, what is even more important are our long-term investment and retirement accounts. Why? Because they are, in most cases, our largest store of wealth other than our homes, and if they are not protected during the next bear market, you could lose 25-50% or more of your net worth. The good news is we can preserve and even grow our long term capital when things get ugly (likely soon) and I will show you how. We’ve recently issued a Long-term Investment Signal for subscribers of my Passive Long-Term ETF Investing Signals.

Stay safe and have a great weekend!

Chris Vermeulen
Chief Market Strategies
Founder of Technical Traders Ltd.

NOTICE AND DISCLAIMER: Our free research does not constitute a trade recommendation or solicitation for our readers to take any action regarding this research.  It is provided for educational purposes only.

European Equities: A Week in Review – 29/08/20

The Majors

It was a bullish week for the European majors in the week ending 28th August. The CAC40 and DAX40 rose by 2.18% and by 2.10% to lead the way, with the EuroStoxx600 seeing a more modest 1.02% gain.

A bearish 2nd half of the week limited the upside for the European majors, however.

Economic data from the U.S on Thursday that included 2nd quarter GDP and weekly jobless claims figures weighed.

On the positive, however, was news of Germany ramping up fiscal stimulus to combat the effects of the COVID-19 pandemic. France announced that it would also roll out fiscal stimulus in September, which was also market positive.

FED Chair Powell weighed on the majors in the 2nd half of the week, however. Talking from Jackson Hole, Powell laid out the FED’s new monetary policy framework.

In a nutshell, the FED has now adopted an average inflation strategy. This means that the FED would tolerate higher inflation for longer to balance out periods of low inflation. Additionally, the FED announced that it would not look to create spare capacity in the economy to counter inflationary pressures.

While the news was largely expected, bank shares suffered on Thursday as a result. A low for longer interest rate environment is also a reminder of just how concerned the FED is over the economic outlook.

The Stats

It was another busy week on the Eurozone economic calendar.

In the 1st half of the week, it was Germany in focus.

The stats were skewed to the positive. 2nd quarter GDP numbers were revised upwards, with the IFO Business Climate Index on the rise.

Through the 2nd half of the week, economic indicators from France and Germany drew attention.

In France, consumer confidence held steady in August, while consumer confidence waned in Germany.

French consumer spending also disappointed according to August numbers, with 2nd quarter GDP numbers unchanged.

All-in-all, the mixed set of numbers coupled with fresh spikes in new COVID-19 cases in France and Germany were negatives.

From the U.S

It was another mixed week on the economic data front.

Consumer confidence took an unexpected dive in August, with the weekly initial jobless claims continuing to hover at the 1m mark.

On the positive, however, was another jump in durable goods and core durable goods orders in July.

FED Chair Powell’s speech from Jackson Hole, however, added pressure on the Greenback, leading to a jump in the EUR.

With European manufacturers struggling, a prolonged period of EUR strength will be a test.

At the end of the week, stats included inflation, personal spending, and finalized consumer sentiment figures.

A pickup in inflationary pressures, a larger than expected rise in personal spending, and upward revisions to consumer sentiment figures failed to provide support to the European majors, however.

The Market Movers

From the DAX, it was a particularly bullish week for the auto sector after the previous week’s tumble. BMW, Continental, and Daimler rallied by 5.12%, by 4.10%, and by 4.28%. Volkswagen saw a more modest 2.80% gain on the week.

It was also a bullish week for the banking sector. Commerzbank and Deutsche Bank jumped by 8.07% and by 6.82% respectively.

From the CAC, it was a bullish week for the banks. Credit Agricole and Soc Gen rallied by 6.84% and by 6.55%, with BNP Paribas gaining 6.93%.

The French auto sector also found some much-needed support. Peugeot and Renault rose by 1.74% and by 4.86% respectively.

Air France-KLM reversed last week’s 2.38% fall with a 5.72% gain, with Airbus rising by 3.42%.

On the VIX Index

It was a 2nd consecutive week in the green for the VIX in the week ending 28th August. Following on from a 2.22% gain from the previous week, the VIX rose by 1.86% to end the week at 22.54.

The weekly gain was only the 3rd in 11-weeks.

The S&P500 and the NASDAQ ended the week up by 3.26% and by 3.36% respectively, with the Dow gaining 2.59%.

The upside for the VIX came in spite of fresh record highs for the S&P500 and the NASDAQ.

Positive updates from the U.S and China trade talks and progress towards a COVID-19 vaccine added support.

VIX 29/08/20 Weekly Chart

The Week Ahead

It’s another busy week ahead on the Eurozone economic calendar.

In the 1st half of the week, August manufacturing PMIs are due out of Italy and Spain, along with the Eurozone’s unemployment rate.

Expect any revisions to Germany and the Eurozone’s PMIs to have the greatest influence.

Mid-week, German retail sales figures will be in focus ahead of service sector PMIs on Thursday.

With the ECB continuing to rely on a consumer-led economic recovery expect the numbers to influence.

At the end of the week, German factory order numbers for July round things off…

From the U.S

It is another busy week ahead.

Key stats will include the market’s preferred ISM private sector PMIs, factory orders, and the nonfarm payroll numbers.

Expect geopolitics and updates on COVID-19 to also influence in the week.

S&P 500 Price Forecast – S&P 500 Hits Psychological Barrier

The S&P 500 has rallied a bit during the trading session on Friday but gave back some of the gains as we got close to the 3500 level. This is an area that a lot of pundits on Wall Street had as a target, so it should not be a huge surprise that people took profits. Ultimately, this is a market that I think will continue to find buyers on value though, because the 3400 level underneath should be massively important. It was the all-time high that we had recently broken, and now I think we may pull back towards that area in order to find it as support yet again.

S&P 500 Video 31.08.20

I would get out of the way this market in the short term, and simply look for value underneath, especially if we get close to the 3400 level. I have no interest in shorting this market, so that might mean staying out of the market for a couple of days. Alternately, if we were to break above the top of the shooting star from the Friday session it would open up the possibility of a move towards 3600, which is now my longer-term target, but at this point in time as far as the market is concerned, we are a bit overextended so it is likely that you should get an opportunity to pick up the S&P 500 at a lower level. At this point, with the Federal Reserve getting out of the way it is likely that the market will continue to run amok.

For a look at all of today’s economic events, check out our economic calendar.

Expanding Wedge May Prompt Big Price Correction – Could A Big Top Be Setting Up Right Now?

RESEARCH HIGHLIGHTS:

  • The Monthly S&P500 E-Mini Futures chart is revealing an Expanding Wedge pattern that has been setting up since Jan/Feb 2018.
  • The VIX has set up a base and begun to move moderately higher over the past 7+ days – above the 20.00 point level and above the GAP created by the initial COVID-19 selloff.
  • Our Custom Volatility Index chart warns of a “bull trap” set up, and we may see an 11% to 15% (or more) sell-off in the US and global markets if the Custom Volatility Index collapses below 10 over the next few weeks.
  • Are These Technical Setups Warning That A Market Top Is Forming?

I want to bring this large expanding wedge pattern to your attention as my research team and I watch the markets continue to push to new all-time highs.  This is a follow on to our research from our Special Alert report warning of Head-and-Shoulder patterns in some of our custom charts. We know it may sound a bit alarming to be the one to bring up a potentially devastating Bearish technical pattern at this time, but as technical traders, we must stay aware of risks even if they may not materialize.  Trading is a process where we take measured risks in an attempt to generate profits over time.  Risk becomes a very big issue if it is not properly managed – just as trading becomes very difficult if one doesn’t learn to take profits in good trades.

LONG-TERM EXPANDING WEDGE RISKS – BE WARNED

The Monthly S&P500 E-Mini Futures chart below highlights the Expanding Wedge pattern that is setting up over the past 26+ months (starting in Jan/Feb 2018).  The US stock market has rallied after the COVID-19 virus event to push to new all-time highs – rising above the upper wedge channel.  Our researchers believe this pattern may be warning of a potential for a very deep price correction – possibly 11% to 18% or more.

There are a number of other technical setups that are starting to confirm a potential break down. The following Weekly Custom Volatility Index chart shows some very interesting price action this week.  First, we want you to pay attention to the Standard Deviation Channels that are drawn on this chart – there are two of them.  The longer-term Standard Deviation Channel is sloping higher while the shorter-term Channel is sloping downward.  We want you to focus on the downward sloping Standard Deviation Channel and how price has risen to the upper 1x Standard Deviation range (the BLUE LINE) and stalled this week (while the markets continue to push to new all-time highs).

This setup on the Custom Volatility Index chart has our research team concerned that these new price highs may actually be setting up a “Bull Trap” – getting retail and institutional traders to chase the rally, then collapsing into a deep and aggressive downward price trend. If the Custom Volatility Index collapses below 10 over the next few weeks, it would indicate a very strong selling mode has begun where we may see a 11% to 15% (or more) sell off in the US and global markets.

Now, pay attention to the long-term Standard Deviation Channel on this next chart.  Notice how the current Volatility Index price level has just recently moved above the MIDPOINT of the longer-term Standard Deviation Channel (the MIDDLE of the Green area within the channel).  This “touch-n-blowoff” type of price action suggests price have returned to the MIDPOINT of the longer-term price Std. Deviation range and run into strong resistance.

If price is going to continue higher, we would expect this Custom Volatility Index to rally above the 14 level and continue to push higher.  Right now, this moderate selloff within the Custom Volatility Index suggests a Peak or Top may be setting up in the markets – suckering in traders as the markets push to new highs on speculative trading in Technology and other sectors.

VIX IS CLIMBING

Lastly, the VIX has setup a base and begun to move moderately higher over the past 7+ days – above the 20.00 point level (above the GAP created by the initial COVID-19 selloff).  Our researchers believe the upward price moves in the VIX over the past few days suggest that FEAR is starting to rise again while the US stock markets push to new all-time highs.

This suggests that many traders are not comfortable with how the markets are pushing ever higher while economic data and forward concerns still persist.  It may be that speculative capital has pushed the US stock market back to new all-time highs while traders chase the Technology Bubble – while more seasoned traders watch and think “what are these people doing chasing these crazy trends”?

Either way, a spike in the VIX above 25 to 30 would certainly spook the market after we have watched traders pour capital into these new all-time highs.  And we believe the potential for the VIX to spike over the next 3+ weeks is substantial given the speed and tenacity of the upward price trend in the US stock market recently.

The upside price rally has been impressive, but is also create a very real risk potential when traders pile into speculative bubbles/trends like this.  We’ve been through things like this before in 1999 and in 2005~2007.  Look at the size of that Expanding Wedge pattern on the Monthly chart.  Being on the wrong side of a 25% downside price correction is not a lot of fun.  Be prepared and follow our research.

While most of us have active trading accounts, what is even more important are our long-term investment and retirement accounts. Why? Because they are, in most cases, our largest store of wealth other than our homes, and if they are not protected during the next bear market, you could lose 25-50% or more of your net worth.

The good news is we can preserve and even grow our long term capital when things get ugly (likely soon) and I will show you how. We’ve recently issued a Long-term Investment Signal for subscribers of our Technical Investor newsletter. Be sure to become a member of my Passive Long-Term ETF Investing Signals.

For a look at all of today’s economic events, check out our economic calendar.

Stay safe and healthy!

Chris Vermeulen
Chief Market Strategies
Founder of Technical Traders Ltd.

NOTICE AND DISCLAIMER: Our free research does not constitute a trade recommendation, or solicitation for our readers to take any action regarding this research.  It is provided for educational purposes only.

 

Workday Upgrades Fiscal 2021 Subscription Outlook after Strong Q2 Earnings; Buy with Target Price of $250

Workday Inc, an American on‑demand financial management and human capital management software vendor, reported a 19.6% increase in total revenue in the second quarter as subscription-based sales surged amid COVID-19 pandemic and raised its revenue forecast for the fiscal year 2021, sending its shares up about 11% in pre-market trading on Friday.

The leader in enterprise cloud applications for finance and human resources also announced that it has promoted Chano Fernandez to co-CEO, alongside Workday Co-Founder Aneel Bhusri, who was previously sole CEO. Both co-CEOs will report to the Workday Board of Directors.

Workday’s total revenues increased 19.6% to $1.06 billion from the second quarter of fiscal 2020. Subscription revenue climbed 23.1% to $931.7 million from the same period last year. Net loss per basic and diluted share was $0.12, compared to a net loss per basic and diluted share of $0.53 in the second quarter of fiscal 2020. Non-GAAP net income per diluted share was $0.84, compared to a non-GAAP net income per diluted share of $0.44 in the same period last year.

“We’re fundamental fans, but believe shares are fairly valued at 12x 2021E rev. vs. comp group at 11.7x. Maintain Hold and raise price target to $250,” said Brent Thill, equity analyst at Jefferies. “We believe unearned revenue will continue to be volatile given the current environment and that investors should focus on subs. backlog.”

Workday forecasts fiscal 2021 subscription revenue between $3.73 billion and $3.74 billion, higher than the previous forecast of $3.67 billion to $3.69 billion.

Workday shares rose about 11% to $240 in pre-market trading on Friday after closing 1.41% higher at $216.63 a day before.  Also, the stock is up over 30% so far this year.

Executives’ comments

“It was a strong quarter despite the environment, with continued demand for our products as more organizations realize how mission-critical cloud-based systems are in supporting their people and businesses through continuous change,” said Aneel Bhusri, co-founder and co-CEO, Workday.

“We executed extremely well in the second quarter and delivered solid results, with subscription revenue growth of 23.1% and non-GAAP operating margin of 24.3%,” said Robynne Sisco, president and chief financial officer, Workday.

“As a result of our strong Q2 performance, we are raising our fiscal 2021 subscription revenue guidance to a range of $3.73 billion to $3.74 billion. We expect third-quarter subscription revenue of $948.0 million to $950.0 million. We are also raising our fiscal 2021 non-GAAP operating margin guidance to 18.0%. Despite the near-term uncertainty that remains, our first-half performance has reinforced our confidence in the fundamental strength of our business, and in the long-term opportunity that we see ahead,” Sisco added.

Workday stock forecast

Twenty-one analysts forecast the average price in 12 months at $228.86 with a high forecast of $296.00 and a low forecast of $140.00. The average price target represents a 5.65% increase from the last price of $216.63. From those 21 analysts, eleven rated “Buy”, nine rated “Hold” and one rated “Sell”, according to Tipranks.

Morgan Stanley gave a target price of $295 with a high of $385 under a bull-case scenario and $125 under the worst-case scenario. Workday had its target price raised by analysts at Cowen and Company to $250 from $190 and Stifel increased it to $227 from $190.

Other equity analysts also recently updated their stock outlook. Monness Crespi Hardt raised their target price to $280 from $215, Deutsche Bank upped their price objective to $220 from $190, Needham raised target price to $260 from $200, Evercore ISI increased their target price to $290 from $205, Barclays upped it to $220 from $162, JP Morgan raised target price to $250 from $200, Jefferies increased to $250 from $195 and RBC raised their target price to $280 from $220.

We think it is good to buy at the current level and target $250 as 50-day Moving Average and 100-200-day MACD Oscillator signals a strong buying opportunity.

Analyst view

“Workday is taking share in the large HCM/ERP market that is gradually shifting to the cloud with a disruptive SaaS platform. Our analysis suggests Workday is a LT share gainer in this space and can continue to grow its premier enterprise customer base globally while penetrating a large mid-market opportunity,” said Keith Weiss, equity analyst at Morgan Stanley.

“Furthermore, we see an attractive rev/customer growth opportunity as the company continues to develop its product portfolio and upsell sales motion. In a very expensive growth software stock landscape, we retain confidence in stories where durable/improving growth and improving margins can drive positive revisions in earnings and FCF – WDAY fits this description, keeping us Overweight shares,” Weiss added.

Upside and Downside risks

Upside: 1) Shift upmarket for the financials module greater than expected traction. 2) Shift downmarket for the HCM module gains more traction than expected. 3) Upsell motion develops faster than expected – highlighted by Morgan Stanley.

Downside: 1) Competition from legacy vendors and/or competing SaaS offerings. 2) Faster growth and higher investments further slow path to profitability. 3) Financials module does not gain traction.

U.S. Stocks Set To Open Higher As Traders Prepare For Years Of Low Interest Rates

The Fed Will Target Average Inflation Of 2%

Yesterday, Fed Chair Jerome Powell provided significant support to stocks as he stated that Fed would target an average inflation of 2%. This means that interest rates will stay at the bottom for years as the current inflation is below 2% while prices remain under pressure due the negative impact of coronavirus pandemic.

Low interest rates together with the unprecedented monetary stimulus are the key reasons behind the current rally. In addition, the Fed’s pledge to keep interest rates low as long as necessary puts pressure on the U.S. dollar, which is also bullish for dollar-denominated stocks.

Not surprisingly, S&P 500 futures are gaining ground during the premarket trading session as traders prepare for years of low interest rates.

Another Attempt To Negotiate The New Coronavirus Aid Package Ends With Nothing

White House Chief of Staff Mark Meadows and U.S. House Speaker Nancy Pelosi were on the phone for 25 minutes, trying to reach consensus on the new coronavirus aid package.

However, the positions of Republicans and Democrats remained too far apart so no progress was made. According to reports, Democrats are ready to decrease their coronavirus aid package to $2.2 trillion, but this is still too much for Republicans who have their own plan that is worth $1 trillion.

As both sides fail to make any progress in negotiations, the economy will not see a new stimulus package anytime soon. Failure to provide additional economic stimulus will ultimately lead to weaker economic reports, but the market will likely ignore the problems on the stimulus front as it is focused on low interest rates.

Personal Income Increased By 0.4% In July

The U.S. has just provided Personal Income and Personal Spending reports for July.

Personal Income increased by 0.4% in July compared to analyst consensus which called for a decline of 0.2%.

Personal Spending was also better than expected, growing by 1.9% compared to analyst consensus of 1.5%.

Better-than-expected Personal Income and Personal Spending reports can provide additional support to stocks.

For a look at all of today’s economic events, check out our economic calendar.

Daily Gold News: Friday, August 28 – Gold Retracing Yesterday’s Fed Talk Decline

The gold futures contract lost 1.02% on Thursday, as it continued to trade within a short-term consolidation following the recent decline below $2,000 price level. Yesterday’s Fed Chair Powell speech led to an increased intraday volatility, as gold spiked higher before the decline. Gold reversed from its news record high of $2,089.20 on August 7 after much better than expected Nonfarm Payrolls release, among other factors. The following upward correction reached a local high of $2,024.60 on last week’s Tuesday.

Gold is 1.7% higher this morning, as it is getting back closer to yesterday’s daily high. What about the other precious metals? Silver lost 1.54% on Thursday and today it is 2.4% higher. Platinum lost 1.24% and today it is 1,. % higher. Palladium was unchanged on Thursday and today it’s also unchanged. So precious metals’ prices are retracing their yesterday’s decline this morning.

Yesterday’s GDP, Unemployment Claims releases have been as expected. On the other hand, the Pending Home Sales number has been better than expected. But the Fed Chair Powell speech caught the most attention and led to an increased volatility.

Today we will get the Personal Income, Personal Spending, Wholesale Inventories and Chicago PMI along with the Consumer Sentiment releases.

Below you will find our Gold, Silver, and Mining Stocks economic news schedule for today:

Friday, August 28

  • 8:30 a.m. U.S. – Personal Spending m/m, Personal Income m/m, Core PCE Price Index m/m, Goods Trade Balance, Preliminary Wholesale Inventories m/m
  • 8:30 a.m. Canada – GDP m/m
  • 9:45 a.m. U.S. – Chicago PMI
  • 10:00 a.m. U.S. – Revised UoM Consumer Sentiment
  • All Day, U.S. – Jackson Hole Symposium Day 2

Thank you for reading today’s free analysis. We hope you enjoyed it. If so, we would like to invite you to sign up for our free gold newsletter. Once you sign up, you’ll also get 7-day no-obligation trial of all our premium gold services, including our Gold & Silver Trading Alerts. Sign up today!

For a look at all of today’s economic events, check out our economic calendar.

Paul Rejczak
Stock Selection Strategist
Sunshine Profits: Analysis. Care. Profits.

* * * * *

Disclaimer

All essays, research and information found above represent analyses and opinions of Paul Rejczak and Sunshine Profits’ associates only. As such, it may prove wrong and be a subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Paul Rejczak and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Rejczak is not a Registered Securities Advisor. By reading Paul Rejczak’s reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Paul Rejczak, Sunshine Profits’ employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

 

U.S. Presidential Elections Are Coming: Should We Vote for Gold?

Over the past few months, we have focused – for obvious reasons – on the pandemic and the following economic crisis. However, there are also other important developments happening in the background, apart from media attention that still focuses on the coronavirus. As they can substantially affect the gold prices, precious metals investors should be aware of them.

One of the most important of such issues is the U.S. presidential election that is approaching fast. And the polls suggest that we could see the change of the President in the White House. As the chart below shows, Joe Biden (blue line) has an average polling margin of 9 percent over incumbent President Donald Trump (red line).

Will Biden win? That’s a great question. Polls say so, but who trusts polls these days? We believe that it is certainly possible, given that some voters could be dissatisfied with Trump administration’s handling of the epidemic, and especially if the second wave of the coronavirus is not contained quickly and the double-dip recession arrives. Trump could share then the fate of George H.W. Bush, who lost to Bill Clinton amid the early 1990s recession following jobless recovery. However, if the economy improves, the race could tighten between now and election day.

What would President Biden imply for the US economy and the gold market? Well, although I don’t support Trump’s trade policy, I’m neither impressed with Biden’s economic agenda. Under his economic revival plan, the federal government would spend $700 billion on research and development for new technologies and energy initiative and on American goods and services. What is key here is that Biden plans to pay for these and other programs by raising taxes “on corporations and the wealthy”. In particular, he wants to hike the corporate tax rate from the current 21 to 28 percent. I can be wrong, but Wall Street would not welcome lifting taxes, especially during the fragile recovery from the economic crisis. So, the stock market could tank, if Biden wins.

But it does not have to… So far, investors are totally unfazed by the polls giving Biden higher chances. After all, still a lot can happen before November, so the markets can be waiting until the outcome of the presidential race looks more certain. It’s also possible that investors expect that Biden would moderate his proposals after elections or that they focus more on other parts of Biden’s agenda. For instance, Biden’s trade policy is less protectionist than Trump’s and he could end the trade wars with China (and other countries) that worried the markets so much last year.

Hence, the possible effect of Biden’s triumph on equities and gold market is ambiguous. Theoretically, given that the stock market rallied, while the price of the yellow metal plunged, after Trump’s victory in 2016 (see the chart below), we should expect the reverse if Trump loses.

But it should be too simplistic reasoning and both the stock and gold market could easily interpret Biden’s possible victory in a bullish manner, as investors tend to do during bull markets. Or, after an initial, short-term volatility, the underlying upward trends could resume. After all, Biden is generally acceptable to the investors. He is not as radical as Bernie Sanders or Elizabeth Warren. He is actually more mainstream in several aspects than Trump. And the financial markets managed to operate or even thrive under both Trump and Obama, whose vice-president was Biden.

In other words, no matter who will reside in the White House, the current macroeconomic conditions should remain generally favorably for the precious metals. We mean here the environment of the soaring fiscal deficits (according to the CBO, the federal budget deficit was $2.7 trillion in the first nine months of fiscal year 2020, $2.0 trillion more than the deficit recorded during the same period last year!) and federal debt (according to the IMF, general government debt is expected to rise to 160 percent of GDP by 2030 even without further rounds of fiscal stimulus!), as well as negative real interest rates, and the fastest pace of growth in the money supply in the modern history, as the chart below shows.

Moreover, no matter who wins, we do not expect radical changes in the accommodative fiscal and monetary policies, and the overall macroeconomic outlook, until the economy fully recovers from the coronavirus crisis. Investors should remember that although politics is important, what the Fed does is also, if not more, important for the stock and gold markets – and the U.S. central bank will not abandon its dovish bias, no matter who would reside in the White House. Neither Trump nor Biden would give up extravagant government spending and stimulus packages. If there is no difference, maybe we should vote for gold?

Thank you for reading today’s free analysis. We hope you enjoyed it. If so, we would like to invite you to sign up for our free gold newsletter. Once you sign up, you’ll also get 7-day no-obligation trial of all our premium gold services, including our Gold & Silver Trading Alerts. Sign up today!

For a look at all of today’s economic events, check out our economic calendar.

Arkadiusz Sieron, PhD
Sunshine Profits: Analysis. Care. Profits.

 

S&P, Dow Close Higher on Fed’s Aggressive New Strategy; Higher Yields Lift Financial Sector

The major U.S. stock indexes finished mixed on Thursday with the S&P 500 and the Dow advancing as investors showed their approval of the U.S. Federal Reserve’s new strategy to adopt an average inflation target and restore the United States to full employment, as well as a promising development in the fight to contain the coronavirus pandemic. The NASDAQ closed marginally lower.

In the cash market on Thursday, the benchmark S&P 500 Index settled at 3484.55, up 5.82 or +0.19%. The blue chip Dow Jones Industrial Average finished at 28492.27, up 160.15 or +0.64% and the technology-based NASDAQ Composite closed at 11625.34, down 39.72 or -0.42%.

The Fed Stole the Headlines

Economic recovery was at the forefront in Fed Chairman Jerome Powell’s remarks made as part of the Kansas City Fed’s virtual Jackson Hole symposium. In the speech Powell outlined the central bank’s aggressive new strategy to support the economy by lifting inflation and returning the economy to full employment, Reuters reported.

Financial Sector Shines

The Fed’s new strategy sent Treasury yields higher, which gave a lift to interest rate-sensitive financials. The financial sector provided the biggest boost to the S&P 500 and the Dow, pushing the former to its fifth straight record closing high and the latter within a hair’s breadth of reclaiming positive territory for the year so far, Reuters wrote.

The Dow remains more than 3% below its record high reached in February. The NASDAQ Composite reached an all-time high, but declines in market-leading momentum stocks capped gains in all three major stock averages.

Stocks in the News

Shares of Abbott Laboratories jumped after the company won U.S. approval to market a cheap, portable, rapid COVID-19 antigen test, which could be a step toward containing the pandemic that sent the U.S. economy spiraling into recession.

Shares of Walmart Inc and Microsoft Corp rose after announcing a joint bid for Tik Tok’s U.S. assets.

Boeing Co closed higher after the European Union Aviation Safety Agency announced plans to begin flight tests of its grounded 737 MAX plane.

Luxury retailer Tiffany & Co advanced after reporting stronger-than-expected profit just days after delaying its $16.2 billion sale to France’s LVMH.

On the other end of the retail scale, discount stores Dollar General Corp and Dollar Tree Inc also beat quarterly profit expectations.

Finally, cosmetics maker Coty Inc plunged after retail closures and weak demand led to a bigger-than-expected quarterly loss.

For a look at all of today’s economic events, check out our economic calendar.

Gap Q2 Comparable Sales Jump 13% as Online Shopping Nearly Doubled Amid COVID-19 Crisis; Target Price $24

Gap Inc, an American worldwide clothing and accessories retailer, reported a 13% increase in comparable sales in the second quarter, largely driven by a 95% surge in online buying amid COVID-19 pandemic, sending its shares up over 2% on Thursday.

The San Francisco-based retailer reported a second-quarter net loss of $62 million, or 17 cents per share, compared to a profit of $168 million, or 44 cents per share, a year earlier. Net sales declined about 18% to $3.28 billion but were above market consensus of $2.91 billion.

“Gap (GPS) is benefiting from the shift in consumer demand toward comfort and casual and impressively increasing its online sales penetration across brands. We believe Old Navy’s authority in the value space and Athleta’s compelling brand positioning in athleisure are resonating with consumers in the current environment and should serve as near-term tailwinds. However, we view Back to School shopping could be both lower and more extended, and we are more cautious than optimistic about holiday sales prospects. Key factors we monitor include: the promotional environment during the holiday season, the possibility of additional store closures, and higher fulfilment costs,” said Oliver Chen, equity analyst at Cowen.

“From a valuation perspective, the stock has rebounded 220% from its low point in March driven by the Yeezy announcement and higher conviction around Athleta and e-commerce sales. Given the stock run, we think the stock upside is limited in the near-term. We view GPS should trade close to the 3-year average FY2 P/E multiple of 11x, and we update our price target to $15 based on our updated FY2 EPS estimate,” Chen added.

The company delivered positive operating income and improved its cash balance by over $1 billion compared to the first quarter, ending the quarter with a cash and cash equivalents balance of $2.2 billion.

The second-quarter fiscal year 2020 comparable sales were up 13%, driven by the strength of Gap Inc.’s scaled e-commerce business, which added over 3.5 million new customers during the quarter. The comparable sales calculation reflects online sales and comparable sales days in stores that have reopened.

Given the high level of uncertainty amid ongoing COVID-19 pandemic, Gap did not provide fiscal year net sales or earnings forecast.

On Thursday, Gap shares closed 2.05% higher at $17.38, the stock is down about 2% so far this year.

Executives’ comments

“We nearly doubled our e-commerce business, with approximately 50% online penetration, demonstrating our ability to pivot to a digitally-led culture,” said Sonia Syngal, Chief Executive Officer, Gap Inc.

“Our strong financial position, healthy cash flow generation and our continued execution of initiatives to drive profitable growth provide the foundation to emerge from the crisis well-positioned to compete in a rapidly evolving marketplace,” said Katrina O’Connell, Chief Financial Officer, Gap Inc.

“Recognizing the uncertainty ahead, we remain committed to amplifying our distinct advantages and leveraging our scale to capture share as demand recovers,” O’Connell added.

Gap stock forecast

Citigroup upgraded Gap from a “neutral” rating to a “buy” rating and raised their price target to $24 from $12. Gap had its target price raised by analysts at RBC to $21 from $18.

Other equity analysts also recently updated their stock outlook. Morgan Stanley gave a target price of $11 with a high of $19 under a bull-case scenario and $3 under the worst-case scenario. Cowen and Company raised their target price to $15 from $11, B Riley FBR upped their price objective to $15 from $10 and JP Morgan establishes December 2021 price target of $16 from $14 for December 2020.

On the other hand, fourteen analysts forecast the average price in 12 months at $14.33 with a high forecast of $24.00 and a low forecast of $8.00. The average price target represents a -17.55% decrease from the last price of $17.38. From those 14 analysts, three rated “Buy”, nine rated “Hold” and two rated “Sell”, according to Tipranks.

We think it is good to buy at the current level and target $24 as 50-day Moving Average and 50-200-day MACD Oscillator signals a strong buying opportunity.

Analyst view

“Gap (GPS) is in need of significant transformation. However, we are more positive on the LT forecast given mgmt’s commitment to fleet and corporate downsizing. The separation work and COVID-19 may be the catalysts GPS needed to downsize its business. Our fundamental concerns remain (falling store traffic, eComm disintermediation, declining brand health, apparel price deflation, falling margins), but are exacerbated in the NT driven by the COVID-19 impact,” said Simeon Gutman, equity analyst at Morgan Stanley.

“We think GPS’ value proposition is potentially no longer competitive, as Gap and BR have lost relevance with consumers; ON and Athleta are relative bright spots. We see a limited capacity for share buybacks, dividends, and SG&A savings in 2020-2021,” Gutman added.

Upside and Downside risks

Upside: 1) Segment comp outperformance (particularly at Gap/BR). 2) Successful revised strategy/execution under a new CEO. 3) Limited CECL impact to credit profit share. 4) Better-than-feared COVID-19 impact / potential recession – highlighted by Morgan Stanley.

Downside: 1) Ongoing Gap brand, BR, and ON performance deterioration. 2) Fashion mis-execution/risk. 3) Competitive risk (particularly at Gap/BR). 4) Worse-than-feared COVID-19 impact / potential recession.

Google Bullish Impulse Confirms Impressive Wave 3 Pattern

The Google stock is breaking into new highs. Can the uptrend keep pushing higher or will a reversal take place? Let’s review the daily chart in this article.

Price Charts and Technical Analysis

Google Daily Chart

Google has made a major bullish bounce since the massive decline in March 2020. The March crash seems to be a wave 4 (purple) retracement. Therefore, the current uptrend is part of a larger wave 5 (purple). The momentum however remains strong and price action is probably still pusher higher within a wave 3 (orange).

Once the wave 3 is completed, a larger but shallow pullback within wave 4 (orange) is expected. Price action could use the support from the previous top and bottoms to make a bullish bounce and uptrend continuation. Only a deep correction makes the bullish outlook unlikely (red x). For the moment, Google stock is expecting at least one more higher high.

Google Daily Chart

Good trading,

Chris Svorcik

The analysis has been done with the indicators and template from the SWAT method (simple wave analysis and trading). For more daily technical and wave analysis and updates, sign-up to our newsletter

For a look at all of today’s economic events, check out our economic calendar.

European Equities: Eurozone and U.S Economic Data in Focus

Economic Calendar:

Friday, 28th August

GfK German Consumer Climate (Sep)

French Consumer Spending (MoM) (Jul)

French GDP (QoQ) (Q2) Final

The Majors

It was a bearish day for the European majors on Thursday, which reversed Wednesday’s gains. The DAX30 fell by 0.71%, with EuroStoxx600 and CAC30 both declining by 0.64%.

FED Chair Powell’s highly anticipated speech from Jackson Hole failed to support the European majors. The FED’s new plans to support employment and inflation weighed on the banking sector, however.

While there were no stats from the Eurozone to consider, economic data from the U.S was a reminder of what lies ahead.

The general consensus is that the Eurozone economy is showing signs of stalling, with the U.S labor market recovery also hitting a speed bump.

The Stats

It was a particularly quiet day on the Eurozone economic calendar. There were no material stats from the Eurozone to provide the majors with direction.

The lack of stats left the focus on economic data from the U.S and FED Chair Powell’s speech from Jackson Hole.

Through the early part of the day, the European majors saw red as a result, with the markets apprehensive. Expectations were for the FED to lay out its new monetary policy approach on Thursday.

From the U.S

It was another relatively busy day on the economic calendar. Key stats included 2nd estimate GDP figures for the 2nd quarter and the weekly jobless claims.

According to 2nd estimate figures, the U.S economy contracted by 31.7% in the 2nd quarter. This was up from the 1st estimate of 32.5% contraction. In the 1st quarter, the economy had contracted by 5%.

On the employment front, initial jobless claims came in at 1.006m in the week ending 21st August. This was down from 1.104m in the previous week while coming in above a forecasted 1m.

The continuing jobless claims fell from a downwardly revised 14,758k to 14,535k in the week.

For the European majors, it was FED Chair Powell’s speech that was the main event. There was no support, however, with the markets having largely anticipated the FED’s latest shift in policy.

Under the new framework, the FED will look to achieve an average 2% inflation rate over time. This would mean that the FED would allow inflation to offset periods of low inflation by hitting above 2% levels. The FED would also support strong labor market conditions and not allow for a fall from maximum levels.

The Market Movers

For the DAX: It was a mixed day for the auto sector on Thursday. BMW and Volkswagen rose by 0.42% and by 0.50% respectively, while Continental and Daimler saw losses of 0.55% and 0.22% respectively.

It was a bearish day for the banks. Deutsche Bank and Commerzbank declined by 0.76% and by 0.82% respectively.

From the CAC, it was a bearish day for the banks. BNP Paribas and Soc Gen fell by 1.11% and by 1.22% respectively, with Credit Agricole ending the day down by 0.58%.

It was also a bearish day for the French auto sector. Peugeot slid by 1.97%, with Renault falling by 0.72%.

Air France-KLM and Airbus SE bucked the trend, rising by 2.41% and by 2.66% respectively.

On the VIX Index

It was a 2nd consecutive day in the green for the VIX on Thursday. Following on from a 5.63% gain on Wednesday, the VIX rose by 5.16% to end the day at 24.47.

The S&P500 and Dow rose by 0.17% and by 0.57% respectively, while the NASDAQ ended the day down by 0.34%.

VIX 28/08/20 Daily Chart

The Day Ahead

It’s a busy day ahead on the Eurozone economic calendar. Key stats include Germany’s consumer climate figures and French GDP, consumer spending and inflation figures.

We would expect Germany’s GfK consumer climate and French consumer spending figures to have the greatest influence.

From the U.S, finalized August consumer sentiment figures and July personal spending and inflation numbers will also influence.

Speeches from the Jackson Hole Symposium and from the U.S administration will also need monitoring on the day.

The Futures

In the futures markets, at the time of writing, the Dow was up by 44 points.

For a look at all of today’s economic events, check out our economic calendar.