Stocks Slightly Higher in Week That Sees Toys ‘R’ Us Bankruptcy Filing
Markets were up slightly this week as the Federal Reserve held the Fed Funds rate constant and hinted at a slower rate of future increases. I would be surprised if we see a rate increase at the December meeting even though the Fed still signaled one is likely. For the week, the Dow increased 0.4% while the S&P 500 was up 0.1%.
One interesting outcome of the Fed’s meeting is the announcement it will start reducing the assets it holds. Prior to the financial crisis, the Fed’s balance sheet was less than a $1 trillion. It’s currently more than $4.5 trillion (roughly 25% of total GDP). Much of what the Fed owns are mortgage securities and Treasury bonds. The Fed started buying assets for a few reasons: to create markets in securities that had become illiquid, to give banks the ability to sell the risky assets to someone and to help hold down longer-term interest rates by a being prominent buyer in those markets. The Fed hasn’t bought much over the last three to four years, but hasn’t started selling for concerns about what adding this much debt back into the market would do to prices and interest rates. The Fed plans for reduce its balance sheet over the next 3-4 fours, so hopefully it can slowly sell assets without causing large moves in interest rates.
Walmart announced this week it is testing a grocery delivery service where the delivery person will come in your house and put your groceries in your refrigerator/freezer, even if you aren’t home. The testing will occur in Silicon Valley with customers who use the August home security system. The system will grant a one-time access code and also has video cameras installed inside the house. This sounds very convenient, but I’m sure how I would feel about a stranger putting away groceries in my house without me there. This is another move by Walmart to compete with Amazon. A few weeks ago, the company started heavily advertising its free 2-day shipping on online orders, a direct shot at Amazon’s popular Prime membership. Amazon has been very disruptive in the retail space and it will be interesting to see how it will compete with Walmart, arguably the best run supply-chain company in the world, now that Walmart has firmly turned its sights on Amazon. Read More
Toys ‘R’ Us filed for Chapter 11 bankruptcy protection this week, meaning it will continue operating as it attempts to restructure its debt. While the retail sector has struggled amid Amazon competition and changing consumer preferences, Toys ‘R’ Us is a story of excessive debt. The company was purchased by a trio of private equity firms in 2005. The buyers used significant debt to pay for the purchase and the company was never able to reduce its debt load. Toys ‘R’ Us was actually doing okay from an operational and financial standpoint, but it had no money to invest in the stores and build out it e-commerce business because its debt service was so large. Bankruptcy was probably the right decision as the company can move forward with a friendlier capital structure. For the three private equity firms though, they are officially losing their $1.3 billion combined investment. Debt is always appealing because it’s someone else’s money, but debt can significantly increase the financial risk of a company. Read More
Oil increased again this week, gaining 1.5% to close at $50.63/barrel. The yield on the 10-yr Treasury moved higher, up to 2.26% from 2.20% last week. The average rate on a 30-yr fixed increased to 3.83% from 3.78% last week.
|10-yr Treasury (∆ in bps)||2.26||6||(19)|