The Friday Wrap

 | Aug 15, 2014 | 7:00 PM EDT
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Last Friday we were in the midst of what some were calling the start of a correction. The rearview mirror is always 20/20 and over the last week we've seen the international concerns that tripped the correction booby trap fade. That was until this morning when stocks erased morning gains following reports of the Ukrainian attack on a Russian convoy in Ukraine. We'll be watching for signs of fallout over the weekend.

We've also seen a string of economic and other data -- the Goldilocks July employment report, a weaker-than-expected July retail sales report following a buildup in inventories during the June quarter, a gloomier eurozone outlook even before the effects of Russian sanctions are felt and more layoff announcements from Cisco Systems (CSCO) and Deere (DE) -- that has likely pushed back the expected timing of a Fed interest-rate hike. Even though St. Louis President James Bullard voiced his view yesterday that he would still like to see the central bank raise interest rates March 2015, the median forecast of more than 70 economists in this week's Reuters' poll put the first rate hike late in the second quarter of 2015.

We'll be sharpening our word-parsing skills ahead of next week's Federal Reserve Bank of Kansas City's conference on the economy and monetary policy in Jackson Hole, Wyo. Expected speakers include Federal Reserve Chairwoman Janet Yellen and European Central Bank President Mario Draghi and we hope they've learned to speak in clearer English than they and their predecessors have over the last year and a half. Given the above commentary, we would expect Yellen to continue her dovish stance when it comes to the economy and to interest rates, but it will be her view on inflation that could be the wildcard.

Helping drive the market higher, corporate earnings have performed better this earnings season relative to expectations and in terms of overall EPS growth year over year. But we'd be remiss if we didn't point out that corporate buybacks have inflated year-over-year EPS comparisons and that actual operating profit growth for the S&P 500 group of companies was more subdued than aggregate bottom-line performance. Scratching your head on this? Well, FactSet reported that "dollar-value share repurchases amounted to $154.5 billion over the first quarter and $535.2 billion for the trailing twelve months."

Odds are we will still see this buyback influence in the coming quarters, not only as companies continue previously-announced share-repurchase programs, but we continue to see announcements of new ones. Just this week GNC Holdings (GNC) boosted its share repurchase program to $500 million from $250 million, while AOL (AOL) announced it would tap the convertible bond market to the tune of $300 million, with $50 million earmarked to repurchase AOL shares. How does the climb in corporate debt to fund these buyback programs impact the P/E multiple investors are willing to pay?

It was not a good week for retailers and restaurant stocks. Given the last three retail sales reports -- each of which fell short of expectations -- as well as the state of the consumer, which we continue to see as cash-strapped, it's of little surprise to see Macy's (M), Nordstrom (JWN), Wal-Mart (WMT) and other retailers trim their expectations. The same can be said for casual dining restaurant stocks like Red Robin (RRGB) and Noodles (NDLS), both of which reported disappointing results and saw their shares head south faster than geese in the late fall. Readers will recall that we've been fairly vocal about avoiding these sectors and, even though the share drops may be tempting, we'd wait until the fundamentals start to improve. For both industries -- retailers and restaurants -- it means seeing wage growth and better disposable income comparisons. For restaurant stocks in particular it means seeing some food cost relief for the protein complex (beef, pork, shrimp) as well as dairy.

On that last point, even though today's headline PPI reading for July was as expected due to the drop in gasoline prices, we'd note that food prices moved higher month over month. Not to pass the buck on this report, but given the rash of announced price increases over the last several weeks, including one this week by Keurig Green Mountain (GMCR) for a 9% price hike for its K-Cup packets, it's next week's July CPI report that we're anxious to see. While we expect to see the impact of lower gas prices as well, the report has the potential to inject some worry over the consumer and his/her spending in the back half of the year.

One flare of caution we picked up was from the Federal Reserve Bank of New York, which issued a reporting finding U.S. auto loans jumped to the highest level in eight years this spring. While that corresponds with the surge we saw in auto and truck sales, peering beneath the headlines we find there is more to the story and in this case it's the Fed's findings that the auto loan surge was fueled by a big increase in lending to risky borrowers. More specifically, the Fed's data show that the dollar amount of subprime auto loans -- defined as loans to borrowers with credit scores below 620 -- has nearly doubled since 2010. While Versace is not ready to throw in the towel on General Motors (GM) shares given the margin benefits to be had with the company's restructuring efforts, the continued climb in subprime auto lending does make him wonder how much longer we have when it comes to year-over-year auto and trucks sales growth.

It's only a few weeks to go until Apple's (AAPL) Sept. 9 event at which we (and the most of the world) expect CEO Tim Cook and crew to unveil the iPhone 6 and potentially other goodies. Expect other companies to try and steal Apple's thunder.  Lenovo-owned Motorola has scheduled a Sept. 4 event where it is expected to launch its Moto 360 smart watch and new smartphone models. Potentially shaking up the mobile space even more, Sprint (S) is expected to announce as soon as next week that it will debut "very disruptive" service prices. Versace has never been a fan of price-cut leaders as a strategy to recover from market-share and bottom-line losses and would rather see new, innovative and sticky service offerings instead. He still prefers the buy-the-bullets-not-the-guns strategy and sees the recent pullback in Qualcomm (QCOM) shares as an attractive entry point. 

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