The Friday Wrap

 | Jul 25, 2014 | 7:00 PM EDT  | Comments
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If you were focused on all of the headlines and announcements this week, you may have been tuning into the news flow from San Diego, where it is ComicCon 2014. For those of us who are focused on investing, we were tuned into the several hundred earnings announcements that hit the tape throughout the week. We also received further confirmation that housing is a sore spot in the economy, but hopefully Hawkins is done gloating by now, and once again we had more signs that inflation is likely to pick up.

IMF cuts its U.S outlook again. On the economic front, not only did June new-home sales disappoint, but a downward revision took the wind out of the May report as well. Layer in recent retail sales and housing starts reports, and the first half of the year is looking weaker than many had hoped for. Current expectations now call for an economic contraction for the first part of the year, but signs continue to point to a far stronger second half. As we shared in Wednesday's Corner of Wall & Main, rail and trucking transport activity remains robust year over year, and the July flash PMI from Markit Economics reports slower but continued improvement in order and output.

Against that backdrop, it's little surprise the International Monetary Fund once again lowered its forecast for U.S. economic growth this year and now calls for a "disappointing" 1.7%. Delving into the prognostication, the IMF sees the second half of the year growing between 3% and 3.5%. Given the recent tone of housing and retail sales as well as yet another leg up in input prices found in the July flash PMI report, we would color the IMF's second-half expectations as overly optimistic. Still, we can't argue with the rebounding industrial and manufacturing outlook, and we continue to favor General Electric (GE), Union Pacific (UNP), American Railcar (ARII), Paccar (PCAR), Parker Hannifin (PH) and other industrial manufacturers.

Restaurant stocks take it on the chin as consumers pivot spending. So far this earnings season, with only modest exception, one group that has failed to live up to Wall Street's expectations has been the restaurant sector. A shining example was McDonald's (MCD), but Dunkin Brands (DNKN) and arguably even Starbucks (SBUX) failed to crush June quarter expectations.

Will it get better anytime soon? According to data from NPD Group, consumer traffic to restaurants in the U.S. has flattened, with few signs of an imminent rebound. According to the findings, U.S. consumers made about 61 billion visits to restaurants during the 12 months ended in May 2014, roughly the same number of visits recorded in the 12-month period a year earlier. How does that traffic compare with pre-recessionary levels? It's down nearly 1.3 billion "annual dining-out occasions." Given the mix of job creation and wages, NPD's

long-range traffic forecast shows annual growth of less than 1% expected for the next several years. That tells us the sector will be fraught with market-share battles at a time when its costs (fuel, wages, healthcare) are continuing to climb --  not a good recipe for margins and earnings.

Consumers are spending, not just where they want to. We have talked about the impact of rising costs, but new data from Gallup verifies something we have been saying: Consumers are spending more, just not on what they want. The data show that the vast majority of Americans are spending more money on groceries, gasoline/fuel, utilities and healthcare. The findings also show that roughly one-third of Americans report spending less on discretionary items such as travel (38%), dining out (38%), leisure activities (31%), consumer electronics (31%) and clothing (30%).

A foodie twist on buying the bullets, not the guns. The sum of those data points means we would not be buyers of restaurant stocks. Rather, we have favored and continue to favor companies such as ConAgra (CAG), McCormick (MKC) and Nestle (NSRGY) as consumers continue to shift more dollars toward at-home eating. Another company worth noting is United Natural Foods (UNFI), which has seen its shares come under pressure over the last several weeks. One theme in Chipotle Mexican Grill's (CMG) impressive earnings report this week is that consumers will pay for healthy and alternative food options.

This underscores to us the prime position of United Natural Foods as some consumers shift toward healthier lifestyles and others contend with dietary restrictions (allergies, gluten and so on). We would recommend that Real Money subscribers use the pullback in United Natural Foods to their advantage as grocery chains such as Safeway (SWY), Kroger (KR), Whole Foods (WFM), The Fresh Market (TFM) and others look to capitalize on this shift in consumer dollars.

Amazon and Qualcomm drops present opportunity. When it comes to taking advantage of stock pullbacks this week, two examples that you should pounce on are Amazon.com (AMZN) and Qualcomm (QCOM). Both stocks are seasonally strong performers in the back half of the year, given the pickup in shopping activity and the release of new smartphone and tablet models ahead of the holiday shopping season. Both will benefit from the continued shift toward mobility, Amazon from online and mobile shopping and Qualcomm from new device models, as well as the continued shift from 2G/3G technologies to 4G.

Stick with Facebook. With mobile on the brain, we have to mention Facebook (FB) shares this week, which are up big. If you pounced on the shares during the April-May pullback like Versace did in the Thematic Growth Portfolio, then good for you! Our advice is to hold on to the shares as the company continues to flex its monetization muscle. Will the potential embedding of Uber in Facebook Messenger mean much? We're not sure, but it does signal that Facebook is looking for new partnerships and monetization efforts, and that we like.

Global unrest worries Wall Street. Throughout history, occasionally a seemingly contained, regional conflict can have unanticipated ripple effects that increase global tensions to such a point as to have significant economic and political impact. Thus it should come as no surprise that a Potomac Research Group poll of institutional investors found that "Global unrest from Ukraine to the Middle East has changed the mindset and investing outlook of leading investment professionals."

The poll of hedge-fund, pension-fund and money-market managers found that nearly half believe that foreign events will have a greater impact on the equity markets than domestic events than they did last year, when 65.7% said that domestic events were more important. This is particularly troubling, given that 88.6% of those surveyed believe that President Obama has been ineffective in dealing with foreign issues and incidents, while only 5.7% said that the president's foreign policies were effective. So far, only 32% claim that recent geopolitical events have driven them into less aggressive investments. That means that more shifting could occur if perception of the risks worsens sufficiently. For full results of the poll, please go here.

That's a wrap for this week, but be sure to check back Sunday night for The Week Ahead.

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