The Daily Dose: Keyed In on Inflation

 | Apr 22, 2014 | 9:30 AM EDT
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I'll just say, right off the bat, that I have zero idea why J.C. Penney (JCP) shares spiked on Monday. I'm sure glad they did, though, because my firm upgraded the stock two weeks ago. If I were dangled from a cliff and forced to speculate on why this happened, I'd say market players may be positioning themselves ahead of a potential sales announcement in the first week of May -- this is set to coincide with the April employment report, which is likely to come in stronger than expected. This is all pure speculation, of course.

In the J.C. Penney chart below, the Dow is in green and the S&P 500 is in brown.

Source: Yahoo! Finance

Talkin' Some Inflation

Ever so quietly, gas prices have begun to rise, and they're now up 3.4% for the past month.

U.S. Gas Prices, March to April
Source: GasBuddy

Also, for one more example, check out these rising coffee prices.

Source: Nasdaq

Overall, signs of inflation are picking up in the consumer basket, so it could be an interesting summer. Some will interpret this activity as pricing power, and thus beneficial to corporate earnings. Others will look at it as a probable demand destroyer caused by a clueless Federal Reserve.  

Whatever side of the fence you fall on, remember this: Such an environment is not necessarily good news for the consumer staples, which are still in the market's favor.

Around the Horn

That aside, here are just a few assorted things I am seeing from inside two earnings reports and call transcripts: Snap-On (SNA) and Kimberly-Clark (KMB)


• The company reported a solid quarter overall, but it also echoed what I've been seeing from many companies: Gross margin compressed in two of three of the company's segments. This is a geeky metric, but an exceedingly important one. It seems that, due to market conditions, there's still a ceiling on how high a company will jack up prices -- and, yes, pockets of inflation are mitigating any price increases that Snap-On is implementing.

• As seen in this report, companies are now starting to stack up sequentially stronger quarters in badly weakened eurozone regions. (So if a company isn't showing such results, toss a red flag onto the playing field.)

• Furthermore, as the weather has turned, second-quarter business conditions have been improving.

• Yes, the situation in Ukraine is weighing on demand. (Snap-On in particular has an office in Ukraine, though the business in its entirety represents 1% of total sales.)


• The company achieved some $70 million in cost savings in the first quarter. Wow -- that's darn impressive. This stuff is still going on? Where the costs are being trimmed: The company has reduced the number of sheets in a roll of its toilet paper.

• If you're not thinking about currency as a headwind to a company's earnings, start doing so now. This has become a particular problem in Australia and Latin America. Price increases have been enacted in those countries to the detriment of volume.

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