The Day Ahead: An Emotional Beating

 | Mar 21, 2013 | 8:33 AM EDT
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Between you, me and the lamppost, Bernanke Fest has left me emotionally drained. Big Ben didn't offer any groundbreaking new information except to blow a goodbye kiss to the role of Fed chairman. This is something I picked up on while watching and live tweeting the extravaganza from his facial expressions and body language.

But the Fed obviously remains ready to support an economy that continues to grow moderately and which is failing to create healthy levels of inflation that drive a durable, flourishing expansion (as duly noted in the Summary of Economic Projections).

Fortunately, there are larger fish to fry than the normal post-Fed session analysis and the hot topic of the moment, Cyprus. I truly believe that valuable messages on first-quarter earnings season went seriously squandered in the data from FedEx (FDX) and General Mills (GIS). It's scary is that each bellwether report was offered to average investors with minimal granular insights -- just run of the mill overviews. This lack of research it only raises awareness that the market could be surprised as new intelligence is received very shortly.

Remember that P/E multiple expansion has underpinned the stock rally, which is the market's way of saying, "I am willing to pay upfront for a better than projected stream of earnings and cash flow." However, you need to be gathering the teensy weensy insights from FedEx and General Mills, not re-watching Bernanke videos and Cyprus riots, and running though a mental checklist with companies owned in the portfolio to make sure valuations have not surpassed realistic financial scenarios.

Here are a few notes I took:

International revenues short of guidance at FedEx by $100 million/General Mills European sales +1%

Structural shift in services used (FedEx) continue, and continue to be a function of real economies in faraway lands that are unaligned with financial market exuberance aided by Draghi comments. The investor has been lured into sleep on international business being on the path to fundamental recovery, but FedEx and General Mills have just slapped you in the face.

It's time to go back and check the growth rates in sales from companies you have owned over the past four quarters. Why? If these two reports were any indication, sales growth is still being achieved through competitive pricing tactics. Mr. Market has factored in the return of strong pricing power on high margin businesses and general improvement in lower margin operations but there is a surprise lurking in the weeds.

Indeed, there could be another round of corporate restructurings. I don't like how FedEx's restructuring efforts are being eaten alive by top-line issues. This dynamic was supposed to change for the better already. Many companies are valued on the notion that they are lean enough and with global growth reacceleration, cash-flow busting restructuring will not have to be enacted. FedEx was a top pick of mine for 2013. Book profits, too many structural issues here that left a bad taste in my mouth.

Helpful Reminder

As you see lululemon athletica's (LULU) earnings roll off the wires and the permabulls talk smack, be aware that there are fundamental problems at the company stemming from the pants recall debacle. The dynamics of a company's supply chain and how it gets product to a location is ultimately critical in determining earnings and cash flow. You probably have never seen a supply chain, which makes this respect exercise more difficult). These are a couple stats on lululemon athletica's supply chain:

lululemon athletica:

  • Has a group of 45 manufacturers, 5 of which produced 67% of its products.
  • Less than 2% of its products sourced from the U.S (shows they can't really monitor their stuff that closely).
  • About 49% of its products sourced from China.

For comparison, here is look at Nike's (NKE) supply chain:

  • Vietnam, China and Indonesia make up 41%, 32%, and 25%, respectively of Nike's sourcing base.
  • Nike's largest supplier makes about 5% of its product (lululemon makes approximately 39%).

Note: I remain negative on LULU.

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