The Daily Dose: The Rally Just Doesn't Compute

 | Feb 18, 2014 | 10:00 AM EST
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So, the Dow industrials has put in its best weekly performance since Dec. 20. The Nasdaq has been up for seven straight sessions. The S&P 500 hit a bottom on Feb. 3. Lastly, domestic economic data has been missing estimates.

Hmm. What one thing on that list just doesn't square with the other three?

Yes, it seems those missed estimates have been spurring a renewed charge on the part of the bulls. To me, this logic is somewhat perplexing. While Mother Nature's influence is not a structural economic issue that suggests a rapidly deteriorating growth rate, the weather nonetheless could set off a chain reaction for the next several months.

To start with, higher heating bills mean fewer early-spring clothing buys at, say, Gap (GPS). That, in turn, promises to produce a profit-busting inventory build -- which will mean manufacturers are currently running at too high a production level and will be forced to gear down in coming months, until supply and demand are in better balance. That, finally, should appear unfavorably in upcoming nonfarm-payrolls reports, in the form of hours worked and overtime.

Or, maybe, folks shouldn't connect these dots when they're choosing how to invest. Perhaps we have to return to the 2013 logic of buying when everyone else is buying, and selling when everyone else is selling. All in all, I enter the week confused about the market's love affair with the notion that data letdowns mean the Federal Reserve won't continue tapering stimulus at the current rate -- and that the poor news, therefore, is actually great news.

Nonetheless, there are a few things you should be watching very carefully, particularly on the consumer front. We largely know retailers reported lackluster holiday sales -- numbers that came in below lowered guidance -- so I am curious on quarter-to-date sales reads given the recent weather and in light of the two consecutive subpar jobs reports.

Specifically, if we hear bad news from Wal-Mart (WMT) and Nordstrom (JWN) and if the market continues to rise regardless -- well, then, that would be weird. But, hey, "weird" apparently constitutes a signal to buy stocks this day and age.

One Reason to Dislike Wal-Mart as an Investment

Wal-Mart continues to over-order nondiscretionary merchandise. That, in my view, is pressuring margins above normal clearance activity.

The origin of this over-ordering obsession could be summed up as follows.

First, Wal-Mart executive lifers are detached from the real economy that surrounds their stores. They don't seem to grasp that this environment continues to mean fewer fill-in trips to its stores, as well as fewer purchases of non-essentials.

Second, for Wal-Mart, the stores' square-footage is so large that executives feel a need to pack it with merchandise, as has always been the operating procedure. I believe Wal-Mart has to completely rethink its big boxes and place technology at the center of its future retailing strategy. Departments should be removed entirely from the stores, to be replaced with online-only ordering. More floor space should be dedicated to fresh food and consumables, and perhaps electronics, as the company works more closely with top vendors to open shop in shops with improved customer service.

Bottom line: Wal-Mart customers are not shopping the entire store. Trust me, I have filmed it with my iPhone.

'Hmm' on Nordstrom

I'm interested about Nordstrom's recent decision to close a store in Seattle, as this isn't something you'll often see from this sort of name. It's yet another sign of companies being hurt by the shift to mobile-based consumption, as referenced in last month's comments from Starbucks (SBUX) CEO Howard Schultz.

A Word on Home-Improvement Retailers

Given earnings reports from Masco (MAS), Stanley Black & Decker (SWK), Generac (GNRC) and Owens Corning (OC), it seems likely that Home Depot (HD) and Lowe's (LOW) have enjoyed a solid fiscal fourth quarter (ended January).

Ahead of earnings, my concern lies in how each of these stocks may react to this week's housing data: starts, permits and existing home-sales, all of which are likely to be sluggish. In light of inclement weather -- and, as Scotts Miracle-Gro (SMG) quietly confirmed of late -- I don't believe Home Depot or Lowe's have started off on the right foot in first quarter.

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