The Daily Dose: The Fed and Fundamentals

 | Jul 16, 2014 | 10:00 AM EDT
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Listen, Fed Chair Janet Yellen's actual comment on equity valuations in certain high-flying markets was that they are "substantially stretched," not simply "stretched." Let's get that correct. It's a meaningful aspect to the Bernanke-summer-of-2013-type comments from Yellen.

Essentially, she told anyone who wants to listen that careful attention needs to be placed on the top- and bottom-line performances of companies, as the Fed is nearing the end of its extraordinary accommodation. At least that's how I read her remarks, before I went back to the Excel modeling drawing board to fine-tune a couple of free-cash-flow estimates on the basis of her hawkish moment in the sun.

Ugh, things had gotten so easy!

As Yellen reminded the masters of the universe and poor slobs who pick up their worked-over stock ideas, you have to respect the fundamentals of companies. What exactly are those fundamentals? Well, they for sure aren't as rosy as June retail sales, Empire State manufacturing and consumer confidence reports would lead a rational person to believe.

Take for instance JPMorgan (JPM) CEO Jamie Dimon's callout that customers are not picking up capital spending. Or how about JB Hunt (JBHT), which provides critical delivery services to national retail chains, being unable to deliver above and beyond Wall Street's sales and earnings expectations?

For me, the most worrying comments on Tuesday didn't come from Janet Yellen. Instead, what made me smile, because I have been sounding the alarm bell on the consumer again [pops collar], were the eye-opening comments from Wolverine World Wide (WWW) CEO Blake W. Krueger. The company sells into Sears (SHLD) and J.C. Penney (JCP), and in my opinion it has a great pulse on the true state of the consumer that no government lifer has the ability to depict via program-derived data.

Check out what Krueger had to say on the earnings call, after the announcement of 140 store closures (I mentioned having concern on Wolverine earlier in the week. Listen to me ... I get tons of information from reliable exec sources in the industry, not random chat rooms):

"Retail climate as promotional and unpredictable like the one we are currently experiencing," said the CEO, before dropping the hammer on revenue guidance (he sees the bottom end of the range as a likely outcome). "The consumer malaise in the U.S. retail market persisted into the second quarter." Whoops.

"The U.S. consumer at least mid-market on down continues to be stressed. This consumer mindset is partially attributable to the weak economic recovery in the U.S. but is also the result of a number of other factors, including the continued dysfunction in Washington D.C., the challenging rollout and uncertainty regarding the U.S. healthcare reform and the lack of the dominant apparel fashion trend." Little bit of everything in these comments!

"I guess I would also say that price increases in non-discretionary items, food, fuel, utilities has also had an impact. These factors have also negatively impacted U.S. brick-and-mortar traffic in general and resulted in highly promotional retail environment that has taken its toll on many retailers."

So the middle-to-lower-income consumer doesn't have money to buy footwear because of higher grocery bills, gotcha. This comment very much aligns with what we heard from Wal-Mart (WMT) U.S. president Bill Simon last week:

"Turning to Hush Puppies. The U.S. business continued to grab over tough retail conditions, particularly weaker demand in the department store channel for casual products." As I noted yesterday, concerned on the quarter from J.C. Penney.

"Challenging retail conditions drove higher than expected promotional activity in our brick-and-mortar fleet." The mall is on permanent markdown, and margins are still in search of a bottom. Again, like I noted this week, it's hard to get excited about the sector at perceived "attractive" valuations.

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