One of the bigger pieces of news this morning is that European Central Bank President Mario Draghi said the odds of further measures to boost the once-ailing eurozone economy are becoming less likely. For those of us that have been paying attention to the monthly PMI data furnished by IHS Markit, this isn't much of a surprise. That data, of late, has depicted not only an improving economy, but one that is seeing a pick-up in inflation. That news will no doubt catch the Fed's attention, as members get ready for the FOMC meeting next week.
Ahead of that meeting, expectations had been climbing for a March interest rate hike, but in the last several days we've gotten some conflicting data:
- January core capital goods orders and shipments contracted.
- January personal spending was weaker than expected, and new studies, like the one from WalletHub, point to consumer debt levels quickly approaching 2007 levels. Perhaps that's why auto incentives rose 14% year over year in February?
- A blowout reading on private sector job creation courtesy of ADP, which was followed by Challenger Gray reporting employers said they would hire 166,266 workers in the first two months of the year, the highest January-February on record.
These conflicting data mean the next several pieces of February economic data in as many days -- Friday's Employment Report and next week's retail sales and inflation reports -- are going to take center stage as the stock market looks to put all the Fed puzzle pieces in place. If the Fed doesn't boost rates next week, all eyes will turn to the next FOMC meeting in May. Hopefully by then we'll have enough information of the pending Trump tax reform that public and private sector economists and other wonks will be able to determine its impact on the domestic economy.
Our preferred method of investing is to examine the shifting landscape of economics, demographics, psychographics and technology shifts to identity pronounced tailwinds that force companies to change their business to meet the evolving needs and preferences of consumers and other customers. Those tailwinds tend to propel a company's business along, and those that can't or won't adapt tend to hit headwinds that weigh on their business and earnings. As you can imagine, we prefer to sidestep those.
Two quick examples of companies benefiting from pronounced tailwinds are Universal Display (OLED) , which is rising the adoption of organic light emitting diode displays across smartphones, TVs and other consumer electronics. We saw this several years ago with light-emitting diodes and it was a barn burner of a time for Cree (CREE) and other suppliers. Given Universal's intellectual property and materials business, we liken the company's business more to that of Qualcomm (QCOM) , than a stand-alone material or chip supplier.
Another is Dycom Industries (DY) , a specialty contractor to wireless and wireline companies. We all feel the pain of slow connectivity when it happens, and as companies like AT&T (T) , Verizon (VZ) , Comcast (CMCSA) and others build out their existing networks as well as deploy next generation ones, it bodes well for Dycom. You can't have people using a network unless it's been built and launched. Pretty simple.
One last idea is United Parcel Services (UPS) , which to us is the missing link in the migration to digital commerce. We've yet to see a slowdown in the shift to digital commerce, and with more bricks & mortar retailers favoring that method of reaching customers, we see no slowdown looming in the next few years. The age-old issue with ordering online, mobile or even back in the old-fashioned days of calling an order into a catalog company, is that your merchandise still needs to get to you. That hasn't changed, and while the delivery method may one day shift from trucks to trucks and drones, odds are it won't.
Again, that's how we see it; and for those wondering, we are patient investors.
