Equity futures in the U.S. are lower across the board by greater than 1% in the early morning hours and in the wake of President Trump’s top economic advisor, Gary Cohn, resigning yesterday evening. The news concerning Cohn’s resignation wasn’t a surprise more so than the timing, which points toward disagreements between President Trump and Cohn on the potential trade tariffs.
In a prepared statement, Cohn said, “It has been an honor to serve my country and enact pro-growth economic policies to benefit the American people, in particular the passage of historic tax reform. I am grateful to the President for giving me this opportunity and wish him and the Administration great success in the future,” Cohn said.
Where Trump and Cohn disagreed on the implementation of trade tariffs, Congressional leadership mirrored Cohn’s sentiment on Monday. On Monday, GOP House Speaker Paul Ryan offered to the president to reconsider the taxes.
“We are extremely worried about the consequences of a trade war and are urging the White House to not advance with this plan,” said AshLee Strong, a spokeswoman for Ryan. “The new tax reform law has boosted the economy and we certainly don’t want to jeopardize those gains.”
Nonetheless, President Trump is seemingly unmoved by the lack of support for trade tariffs presently. The repercussions from trade tariffs, while not fully known, have been heralded by economists to carry the potential for an all-out trade war with various nations. But the facts remain unknown regarding how the President will or would implement these trade tariffs. Some economists, while willing to see some sort of curbs on trade deficits in place, may welcome tariffs that have specific exclusions so as not to cause undue harm to neighbor states that align with the World Trade Organization. Other economists are of the opinion that the President’s proposed tariffs may be a way out of the WTO. Trump is planning to justify the sweeping tariffs on the grounds that the foreign imports threaten national security. The problem with this argument, that President Bush tried to put forth back in 2001, is that it would allow any government to justify such protectionist measures along the lines of national security, which is otherwise boundless. Could you imagine China offering the same argument as to why it confiscates intellectual property and patents that are used in goods and services in its country. It literally opens the door for such a claim?
“The Trump administration is considering a broad range of import tariffs on Chinese goods, according to a Bloomberg report citing unnamed sources familiar with the matter. Under the most severe scenario being considered, the U.S. government would levy tariffs on items that range from shoes and clothing to consumer electronics, the report said. The administration is also weighing clamping down on Chinese investments in the U.S. as it aims to respond to claims that Beijing is engaging in intellectual-property theft, according to the report.”
Foreign governments will more than likely go to the WTO and ask that any of these proposed U.S. tariffs be ruled illegal, which they are as defined by the WTO. But the U.S. could counter this illegality by saying it was taking the action under Article 21 of the General Agreement on Tariffs and Trade. The article says that some binding tariff agreements can be broken during wartime. Such an action or event by the U.S. would leave the global trading community in disarray and the consequences could be immeasurable. It would be unlikely that U.S. courts would permit these tariffs as they did not permit the travel ban, something that gets little recognition or consideration in the media presently.
In terms of exclusions, Mad Money’s Jim Cramer suggested recently that Wall Street is crippled by the possibility of trade tariffs without exclusions.
“I believe a more focused tariff that excludes Canada and Mexico, at the very least, would create a wave of jubilation that would cause a return to our regularly scheduled programming of strong growth with tame inflation.”
The understanding regarding unfair trade, against the U.S., is rather indisputable. We know, understand and have accepted this position for years, decades even. But how to go about remedying the situation in a logical, lawful manner is where the consternation is found. Something needs to be done for the long-term stability of multi-lateral, fair trade. What that something is, remains to be seen.
But enough about trade tariffs, Trump and Cohn as we reflect briefly on Target’s reported results yesterday. The stock was hammered after released results that beat topline expectations, but fell short of earnings estimates by a penny per share. On the top line, Target’s fourth quarter sales increased by 10.0% to $22.8 billion (from $20.7 billion last year) which reflects the impact of an additional week in this year’s quarter, a 3.6% increase in comparable store sales, and the addition of sales in non-mature stores. The company benefited from comparable digital channel sales growth of 29%, which contributed 1.8 percentage points (or 50%) of comparable store sales growth. On the bottom line, Target reported GAAP earnings-per-share of $2.02 in the fourth quarter and $5.32 for the full year. Gross margin fell 40 bps to 26.2% of sales as higher digital fulfillments costs factored in. Target generated adjusted earnings-per-share of $1.37 in the fourth quarter, which represents a decline of 5.6% from the $1.45 reported in last year’s comparable period. For the full year, Target generated adjusted earnings-per-share of $4.71, which declined 6.0% from 2016 EPS of $5.01 per share.
In terms of looking forward, in the first quarter, Target expects a low-single-digit increase in comparable store sales as well as GAAP and adjusted earnings-per-share in the range of $1.25 to $1.45. For FY18, Target expects a low-single-digit increase in comparable store sales and both GAAP and adjusted earnings-per-share in the range of $5.15 to $5.45. Target’s historical PE multiple is 14.5. Shares of TGT tumbled on strong sales, but in an age of continuous pricing investment, investors are concerned as to the inevitability of these margin investments eventually impacting profits further. While Target proposes the margin investments have enabled the retailer to capture market share, investors would rather see that market share feed through to earnings sooner rather than later. Having said that, earnings are expected to grow nicely in 2018, surpassing 2016 earnings results. Additionally, investors are paid to wait in shares of TGT with a 3.45 dividend yield.
At Finom Group’s private Twitter feed, we established a nice scalp trade yesterday as shares of TGT fell on its reported results as shown below.
We’ll take a deeper dive into Target’s prospects going forward in the coming week when Finom Group delivers its full-scale report on Target. Seth Golden, Finom Group President and retail industry analyst, owns shares of TGT. Finom Group maintains a Buy rating on shares of TGT and has recently increase it’s price target from $68 a share to $77 a share reflecting the mid-point of 2018 EPS forecast at roughly 14.5 X FY18 EPS.
Today the economic calendar is light, but may shed some light on Friday’s NonFarm Payroll report. At 8:15 a.m. EST, the ADP employment report will be due out. At 2:00 p.m. EST, the Fed’s Beige Book will be due out. As a reminder, the wage inflation data that accompanies the NonFarm Payroll report is due out on Friday before the opening bell on Wall Street. Economists polled by MarketWatch expect the average hourly earnings to have risen in February by .2% after increasing by .3% in January. U.S. equity futures are picking up where they left off in after hours yesterday, but European markets are not currently affected to the same degree, although lower across the board. The VIX is higher by more than 10% and having recaptured the 20 level this morning. Markets continue to look for stability in the face of heightened geopolitical rhetoric.
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