The Day Ahead: Rate Creep Is Scary

 | Jun 13, 2013 | 8:15 AM EDT
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The following bit of social-media wisdom came on the heels of a call with yet another company that's tied to the housing sector.

I would say this particular company is a late-cycle industrial, meaning it will feel certain types of macroeconomic impact further down the line, as compared with others in the food chain. To put it simply, I was mildly disturbed by the explanations given to me underneath the surface tidy bulleted list (though the details were extremely helpful). Check this puppy out.

New home construction: The data point to watch here is housing starts -- and, while new-home construction is still growing yes due to household formation trends, the acceleration in interest rates may prevent it from maintaining this same pace by early 2014. So the market is correct in adjusting equity prices today for this future reality.

Existing-home sales: Higher rates will definitely impact demand for housing-related industrial products. Large-ticket purchases are being inhibited by slower home-price appreciation -- made so because higher rates have slowed activity -- and the increased cost of credit.

Replacement cycle: Most every company has a replacement cycle for its products. The risk of rate climbs won't necessarily hurt this component of sales, because once a product has lived out its useful life, it needs to be replaced no matter the cost -- assuming the consumer still requires the product.

Bonus Question

Of course, I asked the above-referenced company about rate volatility in emerging markets. As a U.S.-based investor, do yourself a favor and realize that life exists beyond our borders. You must give careful consideration to trends abroad. In a country such as Brazil -- which was mentioned on his particular call, as it's a large percentage of the company's international sales -- customers purchase big ticket items on installment plans. That purchase is unlikely to occur as rates creeps north, both domestically and in emerging markets.

No change in strategy from me in relation to Monday. This market is currently a friend to nobody, and that makes stock selection better saved for trendier periods. On the fun side, I am scheduled to chat with Starbucks (SBUX) today, so send me an email if you are interested in what I'll uncover.

Debt Yields Are Rising -- in the Eurozone

As I have written earlier this year, for some reason U.S. markets continue to trade in lockstep with the debt yields of troubled countries on the periphery of the European Union. The current situation is no different -- although, for the moment, this is going unmentioned as a risk factor as we see renewed debt fears in the EU.

Below are the debt yields of Italy and Spain, which have crept higher since around May 21 -- the same point at which the U.S. markets peaked. Many investors have gotten complacent regarding the EU's situation due to promises from European Central Bank President Mario Draghi and German Chancellor Angela Merkel. These charts suggest that we'd better put the country back on our radar screens as a concern.

Source: Bloomberg

Lululemon, Round Two

The sell-side downgrades we saw on Lululemon (LULU) after the resignation of CEO Christine Day – which, in a few cases, didn't reference her departure as a reason -- were despicable. It bothers me to see consistent inaction by people holding jobs for 10 or more years, covering the same companies, doing the same darn thing every day. At that stage of the game, as an analyst you have to "know" and "feel" the company, and make the proper call. It's that straightforward.

Just look at the two basic charts below. Downtrends on each plus excessive valuation should have triggered a more defensive posture on the stock. Memo to at-home investors: Build charts like these in order to decide on buy or sell calls on your own.

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