Tempur Sealy Shares Plunge Following Lower 2016 Sales Guidance

Shares of Tempur Sealy International plummeted by 22% to $57.60 following the dismal sales guidance issued by the company, informing investors to expect a 1% to 3% decrease in net sales for 2016 compared to last year. Tempur Sealy also put its revised EBITDA at between $500 million and $525 million, down from the EBITDA guidance of $525 million to $550 million that it issued earlier this year in July.

“While our net sales are below expectations, our operational initiatives are going well and are continuing to drive considerable margin expansion,” Chief Executive Officer Scott Thompson said in a press release. “We currently expect net sales for the full year to be down 1 to 3 percent as compared to 2015.” Thompson, who was brought on board by activist investor H Partners Management LLC, has been aiming to cut costs and boost profit margins at the company in keeping with his mandate.

While Tempur Sealy has not been forthcoming with reasons for the decreased guidance, one likely culprit is the booming online market for mattress sales by e-retailers such as Casper and Tuft & Needle. These companies represent only $300 million, or 2% of the industry, but have captured 13% of non-innerspring mattress sales, and continue to increase market share rapidly.

Another factor put forth by The Wall Street Journal is that the rebranding efforts of Steinhoff International Holdings have had a detrimental effect on mattress sales. Steinhoff recently acquired Houston-based The Mattress Firm, the largest US specialty mattress retailer, and currently accounts for 25% of Tempur Sealy’s sales.

Tempur Sealy will release its third quarter results on October 27. According to USA Today, analysts surveyed by S&P’s Global Capital Intelligence forecast $834.5 million in revenue for the third quarter, down from $880 million in revenue that the company made during the same quarter in 2015. Analysts are also projecting $3.1 billion in revenue for the full year, down from $3.15 billion in revenue for 2015.

References:

http://www.marketwatch.com/story/tempur-sealy-shares-fall-as-2016-outlook-cut-2016-09-27?siteid=bnbh

http://www.usatoday.com/story/money/2016/09/28/tempur-sealy-stock/91213106/

http://www.cnbc.com/2016/09/28/tempur-sealy-shares-plunge-23-after-dismal-sales-guidance.html

http://www.wsj.com/articles/less-cash-in-the-mattress-at-tempur-sealy-1475084361

http://www.wsj.com/articles/steinhoff-to-buy-mattress-firm-for-2-4-billion-1470599217

Oil Prices Surge Following OPEC Production Cap

Oil prices surged following news that the Organization of Petroleum Exporting Countries had agreed to cut production and cap output. The international oil benchmark Brent crude rose 6% to nearly $49 a barrel on the back of the announcement.

November West Texas Intermediate crude futures jumped 4.7%, or $2.11, to trade at $46.78 a barrel. US stocks also closed higher overall following the surge in oil prices, with the Dow Jones Industrial Average closing up 110.94 points, ExxonMobil Corp. shares jumping 4.40%. Moreover, the S&P 500 index finished up 11.44 points, or 0.5%, at 2,171.37, while the energy sector jumped 4.3%. Oil prices settled up 5.3% at $47.05 on Wednesday.

The energy ministers from the major oil exporting nations struck the deal during talks held in Algeria in order to limit crude production and reduce the oversupply. The formal details of the agreement will be finalized at the OPEC meeting in November.

The deal stipulates a 700,000 barrel reduction of oil output per day overall, though some OPEC nations will cut their production more than others. Iran, for instance, will be allowed to increase its output. Oil production will be limited to a range of 32.5 million to 33 million barrels per day, down from August’s output of 33.2 million barrels.
“Opec made an exceptional decision today,” Iran’s Oil Minister Bijan Zanganeh said, according to the BBC.

Goldman Sachs expressed skepticism that the deal would successfully limit oil production in the long term, in a note that the investment bank circulated to investors. Goldman said that it would not revise its forecasts for WTI at $43 per barrel by the end of this year and $53 a barrel in 2017.

“If this proposed cut is strictly enforced and supports prices, we would expect it to prove self-defeating medium term with a large drilling response around the world,” Goldman’s analysts said.
Goldman also noted that “compliance to quotas is historically poor, especially when oil demand is not weak,” and that other oil exporting nations not beholden to the quota had increased oil production beyond analysts’ expectations.

References:

http://www.cnbc.com/2016/09/28/goldman-sachs-opec-production-cut-deal-doesnt-change-oil-price-forecasts-through-2017.html

http://www.marketwatch.com/story/us-stocks-close-higher-as-oil-jumps-2016-09-28?siteid=bnbh

http://www.marketwatch.com/story/oil-futures-rally-on-report-of-opec-output-cap-agreement-2016-09-28?siteid=bnbh

http://www.bbc.com/news/business-37502538

http://money.cnn.com/2016/09/28/investing/oil-surges-after-opec-informal-meeting/

The BIS Warns of Record-High Banking Stress in China

The Bank for International Settlements has recently released a quarterly report warning that China’s “credit to GDP gap” has reached a record 30.1%, indicating that the world’s second-largest economy faces mounting debt and credit pressures. According to the BIS, levels elevated beyond 10% signal high banking strain in an economy. In the United States, for instance, readings surpassed the 10% threshold in the lead-up to the financial recession.

The elevated credit to GDP gap suggests excessive credit growth in China and the possibility of a financial implosion. Should such an event occur, the repercussions would greatly damage the global economy. According to the Telegraph, “outstanding loans have reached $28 trillion, as much as the commercial banking systems of the US and Japan combined. The scale is enough to threaten a worldwide shock if China ever loses control.”

China’s total debt has reached 255% of GDP, having ballooned by 107% in the past eight years, and continues to grow, while corporate debt alone has hit 171% of GDP. Though China’s leadership has promised to limit debt growth, it has been hardpressed to follow through on its pledge given that debt has sustained the nation’s economic growth. Government spending on infrastructure and real estate has also proven to be less productive and failed to contribute meaningfully to GDP.

Some analysts have taken to prescribing bank recapitalization and reducing reflexive stimulus spending to artificially sustain growth on the part of the Chinese government. China’s central bank issued a statement earlier this year averring that investors would be able to maintain reasonably high levels of capital in the event of a serious banking shock. The fear, according to the Telegraph, is that a surge in capital outflows may force the central bank to sell off foreign currency to bolster the yuan, “automatically tightening monetary policy” and sparking a vicious cycle.

Significant doubts remain as to whether the government can extricate the nation from its precarious situation, though state control of the financial system may conversely prove to partly mitigate the risk of a banking crisis.

References:

http://www.mauldineconomics.com/outsidethebox/does-it-matter-if-china-cleans-up-its-banks

http://www.bloomberg.com/news/articles/2016-09-18/bis-warning-indicator-for-china-banking-stress-climbs-to-record

http://www.telegraph.co.uk/business/2016/09/18/bis-flashes-red-alert-for-a-banking-crisis-in-china/

http://www.businessinsider.com.au/this-early-warning-indicator-of-looming-financial-risks-is-flashing-red-for-china-2016-9

U.S. Median Household Income Grew by 5.2% in 2015

According to the Census Bureau, household median income in the US was $56,516 in 2015 whereas the highest recorded level of household median income was $57,909 in 1999, a sum that has been adjusted for inflation.The latest numbers were derived from an annual Census Bureau survey of 95,000 households.

However, the Census Bureau also reported that in 2015, the middle and lower classes of America enjoyed the best year of economic growth in decades, though this did not completely erase the losses of the 2008 recession.. Real median household income grew by 5.2%, from $53,700 in 2014 to $56,516 in 2015– the largest such increase ever recorded by the bureau. Median household income outpaced average income, which grew by 4.5% to $79,263.

Furthermore, the poverty rate decreased by 1.2% in 2015, the steepest such decline since 1968, with 3.5 million fewer impoverished Americans than in 2014. Lower income homes disproportionately large income gains, with households in the 10th and 20th percentiles, respectively, seeing 7.9% and 6.3% increases. Households in the 90th percentile, conversely, saw 2.9% income growth. The expansion of health insurance coverage also continued, with the percentage of uncovered Americans falling by 1.3 points to 9.1%.

The gains can be attributed to a stronger labor market, reduced inflation, and rising wages (particularly with regard to minimum wages). Employers added 3 million more jobs while the unemployment rate fell to 5%. The improvements also suggest that America’s economic recovery following the 2008 recession is beginning to spread more broadly, which is a major bone of contention in the current presidential election.

Incomes did indeed increase across gender, racial, and ethnic groups. However, they did not change significantly in rural areas, while cities saw a 7.3% jump in income levels, and the South enjoyed weaker growth than the West.

Median household incomes are still 1.6% lower than they were in 2007, adjusting for inflation, and 2.4% lower than the peak reached in 1999.

References:

http://www.nytimes.com/2016/09/14/business/economy/us-census-household-income-poverty-wealth-2015.html

https://www.washingtonpost.com/news/wonk/wp/2016/09/13/the-middle-class-and-the-poor-just-had-the-best-year-since-the-end-of-the-great-recession/

http://blogs.wsj.com/washwire/2016/09/14/takeaways-from-the-5-2-gain-in-u-s-median-household-income/

http://seekingalpha.com/article/4007202-household-incomes-decline-middle-class

Illinois’ Largest Pension Plan Reduces Discount Rate to 7%

The trustees of the Illinois Teachers Retirement System (TRS) pension plan, the largest public pension in Illinois, voted to lower the discount rate from 7.5% to 7% on August 26, 2016, thereby forcing the pension plan to increase its annual contribution by $421 million to $4.3 billion per year. Had the 7% assumption been in effect earlier, Illinois would have been on the hook for another $421 million for the 2017 fiscal year.

The TRS currently has less than half the assets need to cover all of its benefits and commitments. Illinois governor Bruce Rauner’s administration has warned that the reduced discount rate may have a “devastating impact” on education and social services. His spokesman issued the following statement regarding the vote: “With less than two hours’ notice, Illinois taxpayers including our social service providers and small business owners were just handed a bill for nearly a half-billion dollars. While questions remain about the legality of today’s action, it further underscores the need for real pension reform in Illinois. The continual need to ask more and more from taxpayers proves yet again the current pension system is fatally flawed and must be changed. “

TRS Executive Director Dick Ingram has argued that the legislature has the power to change the law and limit taxpayer contributions in defense of the rolled back predictions. “While some seem to think otherwise, nothing we are considering today is precipitate or rushed. We are following well-established procedures that are consistent with good actuarial practice and conform with the recommendations of the state actuary,” Ingram told the board before the vote.

The move to lower the assumed rate of return was driven by mediocre returns in global equity markets and lower bond yields, which have taken their toll on pension funds. This has in turn put added pressure on state governments. Illinois, for instance, is $111 billion in debt to its five pension plans and has the lowest credit rating of any US state, and its divided government has clashed over ways to overhaul the retirement system. CALPERS reported gains of less than 1% for the fiscal year ended June 30.

TRS last lowered its rate two years ago in June 2014, from 8% to 7.5%, costing the state over $200 million. Rauner has argued that such sudden and unforeseen reductions have had severe financial repercussions for the state.

References:

http://www.chicagobusiness.com/article/20160826/NEWS02/160829890/pension-board-hits-state-with-420-million-tab

http://www.chicagotribune.com/news/local/politics/ct-bruce-rauner-teacher-pensions-vote-met-0827-20160826-story.html

http://www.bloomberg.com/news/articles/2016-08-26/illinois-s-largest-pension-cuts-assumed-investment-return-to-7

http://chicago.suntimes.com/news/sticker-shock-illinois-on-hook-for-another-421m-next-year/