The Day Ahead: Some Quick Hits

 | May 02, 2013 | 8:00 AM EDT  | Comments
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Stock quotes in this article:

cmg

,

bby

,

gnc

As of this moment, the market has acted precisely as I carefully articulated Monday -- and, to be frank, I am bored of continuing to drive home these messages. So, instead of another sweeping overview, here are a few quick hits on individual issues.

Fun With Chipotle

As I mentioned Wednesday, I had a meeting with Chipotle (CMG) in order to see if it was appropriate to place a fat sell sign on this richly valued stock -- yet, sadly, no readers here contacted me with any questions. Unfortunately I can't disclose the rating prior to the dissemination of the report (probably either Friday or Monday), but I can share this one rather intriguing piece of information.

Initially, I was disappointed to hear Chipotle, unlike other quick-service restaurants, currently has no plans to seriously pursue the largely untapped breakfast category in the "near to medium-term." However, there is a very good explanation for this. While McDonald's (MCD) considers all-day breakfast options, for instance, and while Dunkin Donuts (DNKN) fancies up its egg sandwiches, Chipotle's employees must prepare for an 11 a.m. opening during normal breakfast hours as they cut, chop and cook mostly naturally sourced ingredients.

So, in order to pull off breakfast, Chipotle would have to completely overhaul its labor model, thus potentially disrupting its bread-and-butter business of burritos and salad bowls. Given that Chipotle is still a relatively new concept and brand in many locations, it's sensible to focus on the core business in order to drive brand loyalty instead of trying to be everything to everybody.

In any case, my next phone meeting will be with Best Buy (BBY) at 12 p.m. EDT. You might want to be in contact with me this go-around.

GMC: Still Healthy

On Friday, The Street's Debra Borchardt and I are taping a video on GNC (GNC) -- so, within the next couple of days, you are likely to read a positive mention on the company. I've been positive on this stock for a while now; here is the condensed version of my talking points on it.

One point I'll mention: This company is looking to strong earnings accretion by the fourth quarter, thanks to a nationwide rollout of the new GNC Gold Card member-pricing program. This revised program reduces prices for members, enticing them to spend more and with greater frequency (the outcome in test markets). The savings are so compelling, moreover, that non-members will probably pay the $10 for the card, thus making them more frequent visitors to the store.

Fed vs. Fed

This is how I have analyzed the most relevant paragraphs of the Federal Reserve's Wednesday release. You might want to save it for your notes. The language tweaks are in bold below.

* * *

March: "Information received since the Federal Open Market Committee met in January suggests a return to moderate economic growth following a pause late last year. Labor market conditions have shown signs of improvement in recent months but the unemployment rate remains elevated. Household spending and business fixed investment advanced, and the housing sector has strengthened further, but fiscal policy has become somewhat more restrictive. Inflation has been running somewhat below the Committee's longer-run objective, apart from temporary variations that largely reflect fluctuations in energy prices. Longer-term inflation expectations have remained stable."

April: "Information received since the Federal Open Market Committee met in March suggests that economic activity has been expanding at a moderate pace. Labor market conditions have shown some improvement in recent months, on balance, but the unemployment rate remains elevated. Household spending and business fixed investment advanced, and the housing sector has strengthened further, but fiscal policy is restraining economic growth. Inflation has been running somewhat below the Committee's longer-run objective, apart from temporary variations that largely reflect fluctuations in energy prices. Longer-term inflation expectations have remained stable."

Assessment: In other words, the Fed is now signaling that only some sectors of employment are now carrying the weight. It also acknowledged that monetary policy cannot offset sequester impacts.

* * *

March: "The Committee will closely monitor incoming information on economic and financial developments in coming months. The Committee will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability. In determining the size, pace, and composition of its asset purchases, the Committee will continue to take appropriate account of the likely efficacy and costs of such purchases as well as the extent of progress toward its economic objectives."

April: "The Committee will closely monitor incoming information on economic and financial developments in coming months. The Committee will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability. The Committee is prepared to increase or reduce the pace of its purchases to maintain appropriate policy accommodation as the outlook for the labor market or inflation changes. In determining the size, pace, and composition of its asset purchases, the Committee will continue to take appropriate account of the likely efficacy and costs of such purchases as well as the extent of progress toward its economic objectives."

Assessment: Wow -- a whole line was added. After all, the market sold off even as the Fed opened the door to a ramp in monthly bond buys. That's a red flag, and perhaps a sign that the focus will return to a weak first-quarter earnings season.

* * *

The Wrap

The only conclusion is that, in spite of a parade of negative macroeconomic surprises within the April data, the market's expectations have not adjusted accordingly. That inaction leaves me concerned, still, ahead of Friday's employment report, which has had its bar lowered a touch.

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