Daily Rundown: November 22

CHRIS VERSACE: Good morning, Action Alerts Plus members. It's Tuesday, November 22. We have an eye on a series of potential catalysts as we kick off the trading day. Let's start first with the retail earnings. And we have a sea of them, ranging from the likes of Best Buy, Burlington stores, Abercrombie and Fitch, and Dick's Sporting Goods this morning, to after today's market close Guess and Nordstrom.

Now, so far we know it's been a mixed bag out there in retail land. But this morning we've gotten some reports that are candidly better than feared. Reported quarterly figures are modestly ahead of some recently downward revised expectations, sending some of these stocks higher. But we would say that the innards of these report are still somewhat disconcerting to us.

For example, Best Buy, they commented that the promotional environment continues to be considerably more intense than last year. And the company sees its fiscal 2023 North American Comp sales down 10% year over year, hardly a robust environment.

But to that, we can also add falling revenue year over year from Burlington and Abercrombie in what should be the strongest quarter of the year. And, remember, members were still concerned about bloated retail inventories and what it means for companies as they enter 2023, again, especially for retailers-- case in point, Abercrombie.

When we look through their quarterly results this morning, exiting October, their inventories were up to $742 million. That's up 5% from July, but up a staggering 36% year over year. To us, that is not very encouraging, not a good sign at all because, one, consumers continue to spend more on experiences, travel, dining out, those sorts of things, than goods.

And we are also concerned about the ability of consumers to spend the way that they have given layoffs, given inflation, high consumer debt levels, and higher borrowing costs ahead. But-- and there is a but-- what is pain for some is potential gain for others.

And yesterday I had the pleasure of visiting with TD Ameritrade network and sharing why we at AAP continue to favor Costco shares. This morning, those same shares were added to the Bank of America US One list that favors bi-rated US stocks.

Now, why did Costco make that list? Well, pretty simple, B of A joins us in seeing Costco benefiting really from the strong consumer value proposition that it offers, given the continued impact of food inflation and other pressures on the consumer.

But like many others and us too, Bank of America sees a potential membership price increase in 2023. That would be a huge positive for Costco shares because it would be a nice step function higher in that all-important membership fee revenue stream that drives both profits and earnings.

Now, just so we're clear, members, despite the challenging retail environment, we continue to like Costco shares both for the near term and longer term as it continues to grow its warehouse footprint. Also today we'll be watching and listening to what the latest round of Fed speakers have to say.

Now, the stock market seems to be coming to grips with the fact that the Fed funds rate is going to hit around 5% or so in early 2023. But as Bob and I discussed on this week's AAP podcast, there's a thought out there that the Fed could start to cut rates in late 2023.

In our view, this is simply the latest round of hopium working its way into the market. We say that because despite what we've seen with the latest CPI and PPI data, we are miles away from the Fed's 2% target. And we know that Fed Chair Powell and other Fed heads in the past have said, expect some pain on the spike to tame inflation.

And, remember, the Fed is going to continue on this path until, quote, the job is done. We saw that reminded to us from Fed speakers last week. And if this latest round of Fed speakers come out and squash that narrative, that hopiumesque narrative that's working its way into the market regarding a 2023 rate cut, it's likely to throw cold water on those expectations and could, could, be a little bit of indigestion for the market in the near term.

And, of course, we remain vigilant on the situation playing out in China. It's one that continues to develop with Beijing now closing parks and museums and tightening city entry requirements. Shanghai is also restricting things later this week, people going to malls and other venues.

And how bad is it? Well, let's turn to what Nomura has to say. It sees that roughly 20% of China's GDP areas are now in lockdown or some restrictions. That's up from about 15.6% this time last week.

For context, that isn't far off where it was in April during Shanghai's total lockdown. Clearly, this is a developing situation, as I said. But it's one that we can add on to the growing list of reasons that we see headwinds for both the global economy and earnings expectations ahead.

Now, finally, I want to take a look at Vulcan Materials after really strong quarterly results and guidance from a company called Construction Partners, ticker symbol R-O-A-D, you got to love it. Now, Construction Partners is a Southeast regional player in local, state roadways, interstate highways, airport runways, and bridges.

From our perspective members. It's a great barometer of the Biden infrastructure law and related infrastructure spending in the region. Here's what it had to say this morning. First, September quarter revenue was up 41% year over year, huge.

Exiting the quarter, its project backlog was $1.41 billion. That's up from $1.33 billion in June, and up a staggering amount from $966 million when it was at-- excuse me-- exiting September of 2021. But this is the quote that really got me.

The growth we are experiencing is supported by healthy funding programs at the state and federal levels, as well as a continued vibrant commercial market throughout the Southeast. , Moreover the company raised expectations for 2023 with revenue now between $1.4 and $1.55 billion, up from $1.3 billion in 2022.

Stepping back, we see those comments out of Construction Partners very, very bullish, not only for Vulcan Materials. But also as construction activity picks up, it's a great positive as well for United Rentals. Now, that's today's roundup. Thanks for joining us. We'll be back with another rundown tomorrow.