The Friday Wrap

 | Aug 01, 2014 | 7:00 PM EDT
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I'm sure you've noticed it has been a data-and-earnings-heavy week that has also had several other challenges, like yesterday's pullback that dropped the Dow Jones Industrial Average into the red on a year-to-date basis.

Granted, we put much more stock in the S&P 500 as a barometer of the overall stock market, but that too plunged like the steepest drop on a rollercoaster. Should you be wary of the pullback or is it one that you can use to revisit select stocks, like Amazon (AMZN) and others that have gotten creamed?

We've had more than a few companies miss earnings expectations -- thank you Whole Foods Market (WFM), Kellogg (K), Herbalife (HLF) and others -- and a number of positive surprises in LinkedIn (LNKD), Twitter (TWTR) and Weight Watchers (WTW). While that news is something seasoned investors may be frustrated by, they more or less take it in stride. It is earnings season, after all, and at the end of the day it comes down to filling in your investment mosaic. More on that in a minute or two.

The factors that led to a spike in volatility late this week were talk of an Argentinian default, the sharp rise in the Employment Cost Index, which climbed 0.7% in Q2 2014, up from a 0.3% increase in the first quarter, and the initial 2Q 2014 GDP reading of 4%. Our view is that Argentina will soon be a rearview-mirror event for the stock market and as far as the second quarter's GDP figure, odds are it will be revised down much like the first quarter. A good print on an inventory buildup is not something to brag about, let alone expect a repeat of given the one-time nature of the beat. Keep in mind this 1.7% of assumed inventory growth is the largest inventory build in quite a long time, based on very little. We are confident this will be revised down.

Despite that likelihood, the current quarter is shaping up and it looks like the second half of the year will be a far better one than the first half. Truck tonnage data, as well as rail traffic data, points to this, as do auto and truck sales. As far as the timing for interest rate hikes, this morning's Goldilocks not-too-fast, not-too-slow July employment report gives the Fed more runway with its low interest rate policy. While July job creation missed expectations and was slower than in June, we also saw a tick up in the July unemployment rate with hours worked and average hourly wages essentially flat.

To us, that says the Fed won't raise interest rates until sometime in 2015 at the soonest. But then we doubt the Fed will risk the housing market until it is on firmer footing. While shares of Toll Brothers (TOL), Lennar (LEN) and other homebuilders have entered oversold territory, which makes them tempting, we need to see a pickup in fundamentals to revisit those shares.


S&P 500


Putting all of that together, it tells us yesterday's pullback took some froth out of the market and offers a selective opportunity for the mismatch between fallen share prices and favorable fundamentals. From a technical perspective, the S&P 500 is back to its February levels, with overall economic activity looking better in the second half of 2014 than the first half. This morning's ISM Manufacturing Report, as well as the PMI reports on manufacturing in the U.S., eurozone and China were all bullish for the economy. That doesn't even mention July auto sales, which were the highest they have been in years.

That's good for industrial manufacturing and transport equipment companies like General Electric (GE), General Motors (GM), Paccar (PCAR) and American Railcar (ARII) and others. July auto and truck sales rose 9.4% at GM, compared with year-ago levels, led by a 22% increase from its GMC truck and sport utility brand. That's a favorable mix of sales for the company's margins and bottom line. Yet, GM shares have returned to oversold levels due to headline concerns. This could prove to be an interesting entry point, particularly if the Fed holds off raising interest rates longer than expected. Given the robust sequential increase in its railcar backlog, owing to continued strength in hopper and tank car demand, we continue to see upside at American Railcar. The outlook also looks bright at Paccar, given truck tonnage data and truck order/build rates. The one thing that GM, ARII and PCAR shares have in common is they are all benefitting from an aged fleet that needs to be replaced.

Looking at the consumer, in many states this weekend is a tax-free holiday often considered the start of back-to-school shopping. There are a number of reasons to be wary of the consumer, but this weekend will be the first indication as to how credible the National Retail Federation's back to school 2014 forecast really is. In case you've missed it, the NRF expects total spending on back-to-school items to reach $74.9 billion, up 3% from $72.5 billion last year. We'll have more on this next week, but for our money one of the companies poised to benefit is Amazon. 

One other item to watch this weekend is the movie box office performance of Disney's (DIS) "Guardians of the Galaxy," that opens today. It's no secret the box office has been in a slump of late. Just look at the downward move in shares of Regal Entertainment (RGC) over the last five weeks. Could Guardians revive the summer blockbusters for 2014 and be a hit for Disney, or is it more sizzle than steak? We'll find out early next week.

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



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