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Monday, December 13, 2021
And the verdict is: Interest rate hikes from the Federal Reserve in 2022 are OK, says Mr. Market.
Dare I say this week’s Fed decision on Wednesday may be a non-event for the markets? (Our Fed correspondent Brian Cheung shudders at this mere suggestion.) How else should one assess the landscape going into the meeting — stocks shook off the highest Consumer Price Index (CPI) reading since June 1982 on Friday and powered to records. The S&P 500 closed up 3.8% for the week, and gained in four of five trading sessions. All amid a looming Fed meeting, where Chairman Jerome Powell is likely to stick the word “transitory” when discussing inflation in the burning trash bin and uncork the start of a bond tapering program.
So what gives with these rally vibes that are conjuring up visions of a Santa Claus Rally?
Well, the market may have already priced in a series of rate hikes next year, pros believe, as the nifty chart below from the strategy team at Jefferies shows. The chart indicates the market is currently expecting nearly three rate increases in 2022 and yet stocks (and household name stocks, as I detail below) are at records.
“A lot of near-term hawkishness is thus already in the price,” Jefferies strategist Sherif Hamid says.
Goldman Sachs is on the three rate increases bandwagon, too.
“A hike at the March meeting is possible, but we think the FOMC is more likely to wait until May for a few reasons. First and most simply, a turnaround from tapering to rate hikes of just a few days seems uncharacteristic of the Fed. Second, waiting a bit longer would give the labor market more time to progress toward an outcome that Fed officials might more comfortably describe as maximum employment. Third, virus cases might be high in March due to the effects of both colder temperatures and the Omicron variant, which could make a rate hike seem awkwardly timed,” explains Jan Hatzius, Goldman Sachs chief economist.
Yet stocks are trading at records.
This week’s Fed meeting will put this “priced in” theory to the test. Yahoo Finance will be ready to cover it even if it proves to be a snooze-fest for the markets.
Odds and ends
Interesting all-time highs: Who doesn’t like combing through a good list of stocks hitting all-time highs alongside a rallying broader market? To that end, Yahoo Finance’s markets reporter Ines Ferre flagged a few household name companies reaching fresh highs. First up is Apple, as traders ignore chatter of an iPhone demand slowdown and become obsessed with the push to reach a $3 trillion market cap (the first company to do so). Apple could very easily reach that mark early this week — it’s only 1.9% away. Not to ruin the looming party and breaking news banners, but Apple’s stock is trading on the richest valuations since the fourth quarter of 2020, per Yahoo Finance Plus data — so a pullback wouldn’t be a surprise once Apple crosses the $3 trillion level ahead of earnings in a few weeks. Next up on the hot list is Ford, whose stock is at its highest level since 2001. Last week saw a bullish signal by Ford’s Executive Chairman Bill Ford (great-grandson of Henry Ford). Couple that with continued excitement on Ford under CEO Jim Farley, it will be hard to derail the stock in the near-term. Some others that caught my attention while scouring the top 100 stocks by market cap hitting 52-week highs: Housing names Lowe’s, DR Horton, Toll Brothers and Lennar (which is interesting to see amid a shift to tighter Fed policy in 2022 that could slow housing’s momentum) and consumer staples names PepsiCo, Hershey and P&G (is that a sign inflation is poised to decelerate in the first half of 2022?).
Dollar Tree: Dollar Tree flipped two fingers at its new activist investor Mantle Ridge on Sunday (Mantle owns about 5.7% of outstanding shares, a position it disclosed in mid-November). Mantle Ridge wants to replace all 11 members of Dollar Tree’s board — Dollar Tree is having none of it, apparently emboldened by a reportedly underwhelming meeting with the folks at Mantle Ridge. “Dollar Tree’s Board of Directors and management team maintain an ongoing dialogue with shareholders and welcome input about the Company’s strategy and performance. We are however disappointed that Mantle Ridge has been unwilling to engage with us constructively and has instead chosen to proceed in such an unwarrantedly aggressive and hostile manner. Mantle Ridge’s overreach in seeking to replace our full Board with its own hand-picked slate — despite having no ideas or plans to improve on our business or operations — is not justified nor would it be in the best interests of Dollar Tree shareholders,” Dollar Tree said in a tough-talking press release titled: “Dollar Tree Sets the Record Straight Regarding Recent Engagement with Mantle Ridge.”
Dollar Tree’s hand isn’t exactly super strong in this one, even though it continues to point to a 25% rise in its stock price this past month amid promises to sell stuff for more than $1.00 as validation of its strategy. For one, the company’s former long-time CEO Bob Sasser is its executive chairman — this is the same Bob Sasser who overpaid to buy Family Dollar in 2014 (that deal closed in July 2015). Family Dollar has been an anchor on Dollar Tree’s fundamental performance ever since. Meanwhile, the fact is Dollar Tree’s stock has meaningfully underperformed Dollar General (see chart below) the last five years. These are essentially the same companies, that disparity should not exist and says a lot about Dollar Tree’s execution or lack thereof.
Getty Images: Late last week, image provider Getty Images said it would go public sometime in the first half of 2022 after merging with a SPAC called Neuberger Principal Holdings II. The company was taken private by private equity shop Hellman and Friedman back in 2008 at a $2.4 billion valuation. Today, Getty Images is being valued at $4.8 billion. I spent the weekend diving into the company’s financials and business (review the company’s investor presentation here) ahead of CEO Craig Peters coming on Yahoo Finance Live this morning, and came away impressed. Some key points: (1) 46.6% of the business is subscription based; (2) not being insanely valued versus peer comparables that include Shutterstock, Adobe and Warner Music Group (good as it reduces the chance for a disappointment on debut day); (3) Very high gross and operating margins that have stayed at these high levels despite the rise of social media images; (4) generating solid, consistent free cash flow; (5) deal will help cut the amount of debt on the books by more than half; (6) developing an NFT (non-fungible token) strategy. File this name away as one to watch in 2022 post-market debut.
Peloton: Count me as in the minority here, but I kind of like how Peloton’s responding to the uproar over its connected bike causing Mr. Big of “Sex and the City” to have a heart attack in the latest reboot of the series. First, Peloton blamed Mr. Big’s lifestyle of partying and red-meat eating for him dying after a 45-minute ride. Then on Sunday, it put a tweet out saying Mr. Big is alive and is enjoying a romantic evening with his favorite instructor Jess King (Allegra in the show).
Having said all of that, this is still a nightmare for the company right smack in the middle of the holiday shopping season and before New Year’s resolution season in January. It will do no favors to a stock that has been clobbered this year for a litany of reasons, as long-time Peloton bear Simeon Siegel of BMO Capital Markets explained.
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