The Daily Dose: Remember the Bigger Themes

 | Jun 06, 2014 | 11:00 AM EDT
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Let's take a step back on this non-farm payrolls Friday. This week, investors big and small have been bombarded by an overwhelming amount of confusing information.

What exactly did the European Central Bank do on Thursday? Why did the Pillsbury division of J.M. Smucker (SJM) experience a 14% sales nose dive in the first quarter? Where in the world did that ADP payroll miss on Wednesday come from? Is Allianz's Mohamed El-Erian able to speak in non-catchphrases when discussing the stock market and global economy? Personally, I almost have no idea what the dude is talking about half the time (yesterday he dropped the phrase "transmission pipeline" -- perhaps that has something to do with the natural gas boom in the U.S.), but it sure sounds hyper-intelligent.

Also, here is Barron's highlighting my firm's coverage initiation of Wal-Mart (WMT) at a Sell rating yesterday..

Amid these periods of market info overload, which are brought into existence by folks who have limited real-life experience in financial services but who try to predict the next great major market move, I for one like to emotionally reconnect with Mr. Market. To that point, here is what Mr. Market knows that you happened to forget because of too many distracting alerts on the cell-phone news app.

The market will continue to go higher because it can. No scientific research needed. For as long as job creation stays in that 150,000-200,000 range, and as long as countless economic reports slightly beat expectations, the market will march higher, as it doesn't disturb the dovish Federal Reserve. Easy breezy.

The market will continue to go higher because of corporate mindsets. Wal-Mart has shaved 15% from its diluted share count over the past four years. Pretty insane. There are all sorts of companies that are unlikely to acquire competitors (for example, who is Costco (COST) going to acquire?). Instead, they will seek to artificially boost the market price for their shares via repurchases. Until this appetite to create short-term wealth for shareholders subsides because of a shift in the risk/reward, the market is poised to continue to gain ground. Furthermore, companies are aggressively hiking their quarterly dividend payments, prodding investors to buy more stock in the company and flirting with others to enter the market in a meaningful way or expand their portfolio of holdings.

That's the decoded reality. Should one of the variables change (I am growing worried about the current fundamentals of the European Union -- data have been quite suspect, although ECB President Mario Draghi's actions are masking things), then the market will retrench for a duration. In the meanwhile, we'll be hearing stories about horrifically low average hourly earnings in U.S., today and this weekend.

J Crew, Brutal

As I have been saying, I am very concerned about the forward outlook for mall owners. Even "best in class" retail chains are getting crushed on their sales and margin lines from the likes of H&M and Forever 21. Here is what is going down at J. Crew, which is considering a public offering:

Inventories ballooned on a per-square-foot basis in the first quarter, indicating a management team that has completely lost a feel for the trends that relate to its stores in the mall. To commit to these inventory levels six months in advance, given weak sales trends, is not a sign of a prudent management that understands what is happening.

Cash levels are now getting dangerously low while the business clearly continues to deteriorate. The company may be forced to really ramp up promotions into the summer and fall to raise cash from inventory that is not hitting the mark. J Crew operates only 268 stores, so it can't go on a store-closure campaign to raise cash and lower fixed and variable costs. This why its present fundamental position is bothersome.

Overall Takeaway

Reality continues to rain down on J Crew. It's getting attacked from all angles. "Fast fashion" has become appropriate to wear to the office. J Crew was always a go-to place for wear-to-work attire. Now, one could buy something more fun at 75% less than J Crew.

Ann Taylor (ANN) has been on the comeback trail, dropping price points and having some wins within its namesake brand. Nordstrom (JWN) has revamped its floor space dedicated to merchandise that competes with J Crew. Its department store is also doing a great job integrating its stores to online. Also, don't underestimate Macy's (M) (the stock has been on fire, while J Crew issues an earnings whiff). Macy's is shipping product from stores to satisfy online demand. This is very powerful, basically giving consumers little reason to surf the websites of competing retailers.

Bottom line, like Abercrombie & Fitch (ANF), J Crew has not found the magic potion to infuse emotion into its product yet remain true what it is known for. It's a tough balancing act, if it does refresh, it risks alienating a loyal customer who is willing to pay a premium to live the J Crew lifestyle.



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