It's Thursday, and per usual, I have no idea where the week has gone. In between those periods from sunup to sundown, I have felt a tad overwhelmed as I've paid careful attention to the tick-by-tick moves of the market. For me, when I sense that "trade first, ask questions later" mentality creeping into the picture, it means I need to step back and breathe for a second. The mental readjustment process involves tapping into the more fundamental aspects of investing, as opposed to ripping apart charts with ferocity. So, let's do a rewind session in order to fast-forward and be positioned properly, or so I would hope.
If you circle back to my commentary from Monday to Wednesday, my negative tone has been on the rise, with the apex arriving Wednesday. With that in mind, let's look at some of the messages proffered by recent economic data.
Homebuilder sentiment: The headline number was below the low end of the consensus range. February saw a downward adjustment. Words "unchanged" and "holding" were not music to the ears of a bid up market. Bulls received modest love in terms of the report's expectations component, but homebuilder stocks recoiled. The reaction was a sign that the positives of the report were priced in and the downside underpriced -- thoughts that I applied to other data on tap for the week.
Housing starts: The number was short of consensus, and homebuilder stocks were hit again. Up until this point in the week, the saving grace had been that the financial sector continued to bathe in the vibes from the stress-test results, and that technology had stayed firm.
Existing home sales: The guy from the National Association of Realtors sounded as if the housing market was booming once more -- his enthusiasm was borderline silly. (Note: I vividly remember the NAR's commentary from 2006 to 2007.) In any case, the headline existing-home-sales number missed consensus after an upwardly revised January. The negative on this is that these sales levels occurred at record low rates -- but rates have since crept higher. On the upside, homebuilder stocks didn't cede much ground in reaction
International flavor: Reads on China macro were poor, and Spain 10-year yields are at a one-month high.
With all that said, let's turn to corporate clues, which tend to have a greater influence on my near-term market call than do the macroeconomic figures.
• Tiffany (TIF): Showed that consumers in the U.S. and the U.K. have balked at higher prices. It's not all tied to limp banker bonuses in the Northeast, either -- one of the softest parts of the business in the quarter was silver jewelry priced under $250, a classic middle-America trade-up item.
• General Mills (GIS): An in-line earnings quarter before the spike in fuel prices really infiltrated the profit-and-loss statement, and that followed a reduced set of assumptions by management. Hmm.
• Oracle (ORCL): The company turned in a generally positive quarter, but the stock couldn't finish the day on the plus side.
• Cintas (CTAS): It showed 200 basis points of year-over-year operating-margin improvement, and it's working against an employment backdrop that has strengthened considerably. Yet, the stock was taken to the woodshed.
Away from corporate signals, Federal Reserve chairman Ben Bernanke almost echoed the recent commentary by the folks at Pimco -- that Europe's fiscal problems could flare up at any time. This is how I interpreted it, at least.
Conclusion: Having digested all of the above, I am still in search of a new reason to be bullish.
Inside Edge: Morning Earnings Madness
Lululemon (LULU): For the past week I have gotten a large volume of inquiries on Lululemon earnings. Notice that I am not hitching my trailer to this hot rod stock. Instead, I'm using the strong interest in it as a contrarian signal. Essentially, it's a "tell" that there is too much enthusiasm in light of the stock's hearty run, and that is not the type of setup I favor in making a pre-earnings call,
Lululemon had a fine holiday quarter -- it told us so when it materially hiked its earnings guidance in January. The long-term story on the company remains strong, as I believe the yoga category continues to be in its infant stages. I also believe abundant opportunities exist to expand square-footage in the U.S. and extend into new product classifications -- in contrast to other specialty-apparel retailers, which are ripping stores down. It also helps that the company's product is of high quality and driving full-price sales concurrently, setting the brand apart from its peers. (By the way, if you visit Lululemon's website, it should be apparent the brand is no longer a yoga-only company.)
However, I want to see Lululemon's hand. More specifically, I'd like to view how gross margin fared relative to a raised consensus estimate, and would be interested in same-store sales guidance for the first quarter. For instance, are growth rates seeing an intense slowdown after two-plus years of stellar numbers? Revenue derived from Canada interests me as well. This will go for other retailers in 2012, as well, with that country's home values ascending to a point at which many are pondering a U.S. style meltdown.
Dollar General (DG): I have two areas of focus here. First, I'm looking at whether store traffic and transaction amount continue to be fairly equal contributors to same-store sales. If transaction amount increases and traffic is less of a contributor, that will make for a prime hint on how low-income consumers are likely to respond to the company's select price increases. That's not to mention, of course, the onset of higher gasoline prices.
Second, in terms of sales for the past couple of quarters, the consumables category has outpaced discretionary. That, in turn, has weighed on profit margins. A tick-up in discretionary sales would be welcome in view of stronger employment readings, but I am not holding my breath on this.
• Pepsi (PEP) and Coca-Cola (KO) have bucked the price action of numerous consumer-product companies. They've also stood against conventional wisdom, putting in this performance even amid a stronger dollar from late February and creeping inflation.
• Casual dining restaurant stocks are in a holding pattern, almost as if to say, "Will gas prices really wreck our consumer?" Cheesecake Factory (CAKE) is putting in the worst performance.
• We've seen next-legs-higher in shares of TJX Cos. (TJX) and Macy's (M) this week, as opposed to many others in retail. This underscores the strong value equations of these companies' merchandise, which has made both these names stock-gainers.