Ant IPO Postponed by Shanghai Stock Exchange; Doug Kass remains bullish on bank stocks; Update on Lumber Liquidators; What to Expect on Election Night; Last chance for my charity wager; Vote!

1) Wow, I can't wait to learn more about this breaking news: Ant IPO Postponed by Shanghai Stock Exchange. Excerpt:

The Shanghai Stock Exchange postponed Ant Group's blockbuster initial public offering, a day after a quartet of regulatory agencies summoned Jack Ma, the company's controlling shareholder, and top executives to a closed-door meeting.

The meeting with regulators and changing regulatory environment have disqualified Ant from listing this Thursday, the bourse said in a statement on Tuesday.  

Possible fraud at a Chinese company? If so, the only shocking thing about this is that regulators acted before individual investors got incinerated!

2) In my October 13 e-mail, I shared a bullish outlook on banks from my friend Doug Kass of Seabreeze Partners. Yesterday, he sent this update:

Trade of the Week (Long XLF $23.86)

The stars, fundamentals, "the pivot" (from growth to value), bond prices, and charts might now be aligning to produce a strong short term rally in bank stocks

The case for a near term rally in bank stocks may (finally!) be improving:

* Fundamentals: As expressed below, third-quarter EPS results indicated that despite record low interest rates (margins and net interest income) and unprecedented loan loss provisioning, the major money center banks have scaled a lot of their profit headwinds and will still likely record an expansion in tangible book value in 2020 over 2019. Investors should now begin to focus on the "easy credit compares" and nadir of net interest spreads next year.

* Bond Prices Are Firming: Bond yields are approaching the highest level since June. Bank stocks are the most asset sensitive sector and directly benefit from rising fixed income yields.

* The Charts May Be Aligned: Surprisingly to many the relative performance of banks stocks has been flat since July. Look closely and a breakout to the upside (of the BKX) could be at hand:

Source: The Divine Ms M

Moreover, on Thursday, in "Have The Charts of Financials Begun to Turn More Favorable?," I pointed out that the chart of JPMorgan Chase (JPM) and other banks looked deeply oversold and similar to the favorable set up of a year ago – right before the group had a strong absolute and relative move higher:

However, this time, the relative strength line has been OK.

* The Pivot From Growth to Value May Finally Be At Hand: Banks are value stocks and should be a prime beneficiary of the pivot.

Bottom Line

Despite the near-universal hatred towards the group, the relative earnings momentum of banks (against the non-financial components of the S&P 500 Index) will begin improving materially in the quarters ahead. That positive momentum and change in the rate of growth will accelerate as 2021 progresses.

Not content with my already large financial holdings, I have recently added to my four money center bank positions, and established a new position in Goldman Sachs (GS).

Finally, let's remember that in a market dominated by products and strategies that chase price and momentum ("buyers live higher"), should bank stocks make a move higher from here, the machines and algos will be following and buying bank stocks, post haste.

And the same cabal that is bearish on banks will then turn positive on banks.

3) In my September 17 e-mail, I shared a bearish report on flooring retailer Lumber Liquidators (LL) when the stock was around $22. Yesterday, the company reported strong earnings and the stock popped 16.4% to close at $25.75, so I asked my source for an update. Here's what he had to say:

While on the surface, LL's Q3 was impressive, when you consider the most favorable market backdrop in years and its performance vis-a-vis its largest competitors, I'd say LL's quarter was a bit underwhelming.

Let's first look at what went right:

1. LL managed to keep expand its gross margins to 39.4%, not far from its all-time high around 41%;
2. Hardwood, which has been declining for three years, finally saw a marginal YOY increase;
3. Customer deposits heading into Q4 are very strong (up ~42%), which points to a potentially robust Q4;
4. LL managed to contain costs quite well, particularly its marketing spend. If LL can leverage its new digital ad strategy for the next few quarters, this will keep profits elevated even if LL gross margins decline somewhat.

Here are the reasons I'm still bearish:

1. While margins were high, LL's lower in-stock inventory positions at the end of Q2 and Q3 mean they are turning their inventory faster than their big-box competitors. Normally high inventory turns are a good thing, but not in this case, because the exemption for the 25% tariff on vinyl plank flooring from China (which accounts for most of what LL buys) recently expired. This means that LL will face higher costs relative to its competitors as it replenishes this inventory, so it will have to accept lower margins in Q4 or raise prices to maintain margins, but risk slower growth and/or loss of market share (note that home improvement giant Home Depot (HD) has dropped the price of its Lifeproof vinyl flooring back to its 2018 level, which forces everyone else to follow);
2. For years LL has been a go-to destination for premium hardwood, but the category has been in secular decline for several years. One quarter of growth is hardly a trend, and until LL (or any flooring retailer) can put together a string of quarters showing growth in the category, I do not believe the bleeding in hardwood has been staunched. More likely, this is a COVID-induced nesting phenomenon rather than an inflection point;
3. If customer deposits are up because of demand, that's great. However, if customers were waiting on product to arrive due to low inventory levels in Q2/Q3, that elevated deposit number will not translate into a significant sales beat in Q4;
4. LL still has a number of legacy locations that are in out-of-the-way, lower-rent industrial space, which require more marketing spend to drive traffic. LL is touting the impact of its new digitally focused marketing program, but the strong performance in Q3 may simply be due to increased COVID demand;
5. While LL posted a 10.9% comp in Q3, it was actually only 8% when you adjust for a network security incident last year that cost LL $6 million to $8 million in sales. This pales in comparison to Floor & Decor's (FND) comp (adjusted for Hurricane Dorian, which LL didn't even mention) of 17.8%, HD's 23.4%, and Lowe's (LOW) 34.2%. Any way you slice it, LL is underperforming its larger peers;
6. FND's 75,000-square-foot warehouses have proven to be far superior to LL's 800-square-foot to 1000-square-foot showrooms. Just look at the quarterly sales of the two companies over the past eight years:

You can imagine, therefore, what happens to the sales at nearby LL stores when a FND warehouse opens nearby.

FND only has 128 stores, but is planning to steadily grow over time to at least 400, which is likely to cause LL a lot of pain for many years;

7. LL's weakness is illustrated by the fact that, even in the strongest housing market in years, driven by 3% mortgage rates and a COVID nesting boom, the company finally decided to close its eight Canadian stores as well as another six U.S. stores that have been underperforming. LL management indicated that this was the extent of its "real estate review," but I suspect LL will need to close more stores over time, especially ones that have to start competing against new FND units.

In conclusion, LL is no longer facing an existential crisis. It has finally fixed its balance sheet, put most of its legacy issues behind it, and has the most bullish market backdrop possible to take some risks, effect a rebrand, and get back on a stronger footing.

That said, my outlook for LL is much more bearish than the current consensus view because it has big disadvantages relative to its much larger competitors – FND, HD, and LOW – and its smaller showrooms are not an easy fix.

Thus, at nearly $26, up nearly 600% from its March lows, I believe LL's stock has too much optimism priced in. At a minimum, I'd simply avoid it or, for more aggressive investors, short it paired with an FND long...

4) I'm sure I won't be the only one glued to the TV and various websites tonight as the election results come in. Here are some articles with good advice on what to expect and when:

• Wall Street Journal: Election Night: What to Watch for in Key Races
• New York Times: What We'll Know, and When We'll Know and Needle Update: What to Expect on Election Night
• FiveThirtyEight: Both Candidates Might Fall Short of 270 Electoral Votes on Election Night. But How Close Might They Get? and When to Expect Election Results in Every State

5) More than two dozen people have taken me up on my friendly wager for charity on the election, totaling more than $13,000. Nearly all are supporters of President Donald Trump who think he's going to win, but one woman e-mailed me to bet $1,000 along with this note: "To be clear, I want Biden to win. But after the shock of the last four years, this would be the only good thing to come out of a Trump win." Another thinks Trump is going to win New York State, so I gave him 10:1 odds and he made a $1,000 side bet!

If you want to take me up on my wager, please e-mail me at WTilson@empirefinancialresearch.com and let me know how much you'd like to bet – ranging from a minimum of $100 to a maximum of $2,500. I'll accept all offers until 5 p.m. Eastern time today up to a total of $25,000.

6) Irrespective of your political leanings, I urge you to vote. My wife, two of our three daughters (our middle one is a senior at Wake Forest and therefore voted in North Carolina), and I did so on Wednesday. It was Katharine's first time (she turned 18 on May 29)! Here's a picture of us right afterward:

Best regards,

Whitney