The Daily Dose: Piecing Together a Puzzle

 | Aug 27, 2013 | 11:00 AM EDT
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For us in the investment community, there are currently no big news stories to sink our teeth into. Yes, potential U.S. involvement in Syria is a development to be monitored closely, given the headline risk it brings to oil prices. Rising gas prices, in spite of ample supply, is the last thing the U.S. consumer needs, going by commentary from retailers on earnings calls.

But, overall, I'm only seeing scattered tiny stories that bear watching as September nears.

Bad News is Good News

Monday's modest rally, triggered by a woefully disappointing July durable-goods orders report, was trampled by Secretary of State John Kerry's speech on Syria. At least initially, the message to me was this: The market believes that, ahead of the September Fed meeting, a couple of data misses will delay the central bank's slowdown in bond-buying. Looking at the market action up until around noon EDT Monday, this view gathered strength, as evidenced by the following.

  • iShares U.S. Home Construction (ITB) and SPDR S&P Homebuilders (XHB) continued to bounce back.
  • The 10-year U.S. Treasury yield broke 2.8% on the downside.
  • Utility shares were weak.

Then something strange caught my attention: Consumer staples continued to trade poorly! The read here, possibly, is that the market expects the Fed's stimulus tapering to start incrementally -- just as the underlying economy softens further. That, by the way, may shortly be captured by revised Fed economic projections.

I know -- I'm drawing a ton of conclusions from a single day of trading. But one has to do this in order to stay ahead of the mere mortals.

If you're resigned to reading deeper into this consumer-staples malaise, consider the following potential risk for selling pressure: July net inflows into consumer goods and service funds totaled roughly $1.5 billion. That's the highest inflow this sector has logged in the past 10 years. In other words, investors are silently flocking to this "don't bet against the U.S. consumer trade," assuming attractive valuations, yet the market itself suggests this is an incorrect wager in the near term.

The bigger message here is that the consumer-spending slowdown has deeper roots than just the advent of people scoffing at the apparel tables. Beyond that, it has folks trading down in food and purchasing less food. (Wal-Mart (WMT) subsidiary Sam's Club did note a food trade-down in the second quarter).

As you can see in the chart below, foodmakers have been underperforming the S&P 500 (in brown) over the past week. Check out Campbell (CPB) in blue; General Mills (GIS) in red; Kellogg (K) in dark green; and Hershey (HSY) in light green.

Consumer Staples Underperformance

Mid-Quarter Warnings?

Don't think I am crazy, but it's almost two months into the third quarter, and we're seeing serious underperformance among such major Dow components as Coca-Cola (KO) and General Electric (GE).

Let's spotlight GE, which theoretically should be sitting pretty due to structural cost removal and robust backlog.

After reviewing this company last week, I was left with the sense the market is positioning for a subpar third quarter due to sluggishness in both the U.S. and in the emerging markets -- and durables goods numbers have thrown gas on the fire. Pricing on the company's backlog was only up 0.9% in the second quarter, and I wonder how that will evolve into next year if orders are running a little below plan.

In GE's second-quarter earnings release, CEO Jeff Immelt was quoted as saying, "Emerging markets remain resilient, and in the U.S. we saw strong growth in orders this quarter." The situation seems to have flipped at present. That raises the risk of earnings estimates revisions.

GE is in green on the chart below, which covers the past month of trading, along with Coke in green, Disney (DIS) in brown and overall Dow action in red.

Dow Component Underperformance

Notable Moves

In the "weird moves" category is RadioShack (RSH). I have no idea why the stock spiked in the manner it did Monday.

In the "not-so-weird moves" column, meanwhile, is J.C. Penney (JCP). On Monday evening I reiterated my sell rating on the stock, and a $12 price target, following the news that activist investor Bill Ackman would be exiting his stake in the name.

When it comes to this name, everything is unfolding as I thought. I expect J.C. Penney shares to be under perpetual near-term pressure as Ackman's 18% stake is sold in parts by underwriter Citigroup (C). His shares can't be sold in one fell swoop, as J.C. Penney enacted a poison pill a week ago. It's likely the company implemented this as it caught word that Ackman was planning to dump, dump, dump.

Next up for J.C. Penney: a new share issuance that bolsters its capital position and penalizes existing shareholders. (As of the filing on Monday evening, there were 28,212 of them.)

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