Saturday, June 17, 2017

TLH Market Review - 6/17/17

The big news this week other than Amazon(AMZN) snapping up Whole Foods(WFM) for $13.7 billion was the Federal Reserve sticking to it's guns to raise interest rates yet again.  The move by the Fed was widely expected.  In turn equity markets were relatively muted during the event, and even the bond market saw a modest reaction.  In fact yields on 1 Month Treasury Notes actually fell after the announcement.


 

However during the course of the year Treasury yields have put together quite a run with the short end of the curve seeing an impressive run-up in yields YTD.  Here is the percentage change in yield for 1 Month, 6 Month, 1 Year, and 2 Year Notes.

1 Month: +95.45%
6 Month: +82.26%
1 Year: +42.35%
2 Year: +12.50%

That's a lot of movement in bond price land.  What's also of interest has been the decline in the 10 Year Bond which is down from it's recent March 2.6% highs and now yields 2.15%.

Personally I'm slightly confused by the Fed's move. Remember last year the Fed kept talking about "data dependency". Now the Fed has basically come out to say they think the data is going to come in strong enough to warrant the hike.  That's quite the quandary they could be backing themselves into if the data doesn't come in stronger. In fact recent core CPI(exlcuding food & energy) data is barely registering any gains. Just look at the last 3 months with core inflation coming in at -0.12%, +0.07%, and +0.06%. That's low.

Now that's not the only metric used to determine an interest rate hike, but the Fed is highly cognizant of inflation data.  So after taking it all in it'd be my assumption the bond markets muted reaction is currently saying we are OK with this hike, but another one might not be such a good idea if it's too soon.

We'll see how this goes. The Fed Blue Dots currently predict another hike this year, and 3 more in 2018.  

Portfolio

The portfolio had no big company specific news this week.  Although the aforementioned Amazon/Whole Foods deal definitely caused a stir in a few names. Costco(COST), Hain Celstial(HAIN), and steady eddy McCormick(MKC) saw a plunge. Even sweetheart Hershey's(HSY) fell over 2% on the news. Who knew selling chocolate bars could be this dramatic??

I understand why Costco shares dropped. The company has been one of the few to withstand Amazon's onslaught in retail. Plus it's hard for Amazon to ship you a frozen side of goat(yes they do sell them in a store near me), salmon, eggs, and mozzarella sticks.  Costco is actually one of the largest organic food retailers in the country.  This is a direct move into the field that currently keeps a lot of Costco customers coming back. I'll be watching this closely.

I think the reasoning behind Hain and McCormick has more to do with one buyer leveraging greater purchasing power.  Hain has noted in conference calls before that selling on Amazon was becoming a big part of it's business.  Even McCormick sells all sorts of flavorings, and spices on Amazon.  Both companies sell plenty of product to Whole Foods.  That kind of leveraged buying power is likely going to cut into margins. Although I think the market may initially be overreacting in a bit of "sell first and ask questions later" kinda way. McCormick reports earnings June 29th so I'll be intrigued if they comment.

We have two weeks before the quarter is over. It will be a great time to see how the portfolio has performed. 

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