How Merry Will Christmas Be? Part Two

American markets today, Wednesday, viewed several hours before the opening at 9:30 a.m. EST, appear set to start in negative territory as the S&P 500, NASDAQ and DOW are all trending down.

Also in American markets investors will be looking for the potential impact on JPMorgan Chase shares following remarks by Chairman and Chief Executive Officer Jamie Dimon. “I made a joke the other day that the Communist Party is celebrating its 100th year - so is JPMorgan. I'd make a bet that we last longer," he said, according to reports in Reuters and other media. "I can't say that in China. They are probably listening anyway," he said.

JPMorgan has extensive operations in China including branches in Chinese cities such as Beijing, Shanghai, Shenzhen and Guangzhou. In August Chinese authorities granted approval for JPM to set up the first fully owned securities brokerage. Whether the sensitive Chinese government takes offense at Dimon’s remarks remains to be seen. JPM closed yesterday at $168.28 but is trending slightly down in pre-market trading at time of writing. Whether Dimon’s remarks shake JPM shares in the way that Elon Musk’s remarks shake Tesla shares also remains to be seen.

More broadly, the announcement that President Joe Biden plans to nominate Jerome Powell for another term as Chair of the Federal Reserve Bank implies stability at a volatile time.

Canadian markets also look poised to start in the red.

European markets have opened at time of writing and major indicators there are trending further down in the red at time of writing, as investors there weigh the impact of renewed COVID surges and restrictions. Germany – in many ways the economic engine of Europe -- may announce lockdowns as soon as today.

Amongst precious metals, gold and silver are trending up at time of writing.

Amongst currencies, the Canadian dollar, Euro and British pound sterling are all down against the American greenback. The Euro continues feeling the effects of COVID restrictions, according to Jeremy Thomson-Cook, Chief Economist at London-based international business payments specialist Equals Money.” (The Euro) remains languishing close to yearly lows as increasing COVID-related restrictions across many parts of Europe throw doubt over the nascent economic recovery,” he says. “Despite less dovish commentary from some ECB (European Central Bank) members the Euro has failed to rally as German lockdown fears in particular weigh heavily on the Euro.” The pound sterling will continue trading in a tight range, Thomson-Cook says.

In the previous column I stated that this week’s market action would provide some insights about how merry the upcoming Christmas might be and yesterday brought some clues. Best Buy Co. Inc. released third quarter results and as expected, it reported sales below expectations due to supply chain issues which are likely to continue. Best Buy is facing supply constraints in categories such as appliances, mobile phones and gaming, Chief Executive Officer Corie Barry said on a post-earnings call, according to a Reuters report. Analysts have warned of potential shortage of Apple’s iPhones. The importance of this shortage goes beyond sales of these specific products. They act as magnets for Best Buy to attract customers who often spend on other products, according to the same Reuters report. Best Buy shares closed at $121.38, a drop of $16.62 or 12.04 % although the drop had been far greater during the trading day.

In the good news-bad-news category, Abercrombie & Fitch beat analysts’ estimates for its third quarter results, coming in at $0.86 per share compared with $0.76 a year ago while analysts had forecast $0.66 per share. Sales for the third quarter hit $905.2 million, compared with $819.7 a year earlier while analysts had projected $895.2 million. However, the company expects costs of $75 million due to higher freight rates. It closed at $41.11, down $5.93 or 12.60% although the drop had been greater during the day.

Also in the good-news-bad-news category, American Eagle Outfitters reported third-quarter results at $0.74 per share up from $0.32 a year earlier. Revenue hit $1.27 billion compared with $1.03 billion a year earlier, beating estimates at $1.23 billion. However, American Eagle forecast additional holiday freight costs of between $70-$80 million. It closed at $28.77, up $1.31 or 4.77% on the day.

In another Christmas surprise we might have expected payment processors such as Visa and Mastercard to push ahead as the holiday season approaches. However, Visa and Mastercard have pulled back lately, a seeming contradiction in terms. The cause has nothing to do with the season and everything to do with retailer resistance. “Large retailers are pushing back on the fees charged. They operate on thin margins, so transactional costs can mean a lot to the bottom line,” explains Jay Nash, Senior Vice President at National Bank Financial in London. “This has not gone unnoticed by the markets. Visa is currently about 20% below it’s highs and Mastercard is down 15%.”

Nash explains that while the future of these companies looks bright, they are not cheap. Investors can be attracted by the amount that they have sold off but using the most recent data Mastercard trades at over 40x forward earnings and Visa at nearly 30x. Both offer dividend yields below 1%. The combination of high forward earnings figures and low dividends makes them still appear expensive.

Moreover, on top of the pressure from major retailers both are facing increased competition. The point of transaction used to be an area of control for these companies, but a move to digital transaction and the introduction of companies like PayPal and Square have greatly reduced these barriers which could impact future growth potential, he explains. These stocks may not regain their recent highs very soon, he cautions.

So it will be a Merry Christmas – very mixed but still merry.

Al Emid is a financial journalist, broadcaster and author with two books underway. The Emid Report on Volatility 2022 is scheduled for release in January 2022 and his book on overseas investing is scheduled for release in January 2023.

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