Corner of Wall & Main: Food Prices

 | Aug 27, 2014 | 5:00 PM EDT
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Yesterday saw a number of positives for the stock market as the S&P 500 crossed the 2,000 mark, despite increasing economic woes in a large part of the global economy from Europe to Japan.

A ceasefire between Israel and the Palestinians and Russian and Ukrainian leaders agreeing on the need to "de-escalate" the conflict should curb the international tensions that have weighed on the markets.

But for investors who subscribe to the theory of buying when there is blood in the streets, now might be a good time to look at Russian equities with the Russian Micex trading at around 5.3x projected 12-month earnings, a 57% discount to the MSCI Emerging Markets Index, according to Bloomberg. One of the easiest ways to do so is through the Market Vectors Russia ETF (RSX), whose largest sector weighting is unsurprisingly energy. Lukoil (LUKOY) and Gazprom (OGZPY) are its two largest holdings. 

Investors are also eyeing more stimulus from the European Central Bank, which has driven European shares and ETFs like the iShares S&P Europe 350 Index ETF (IEV) higher over the last few days. Bond yields in the eurozone continue to fall even further into record lows, with the Italian, Spanish and Irish 10-year yields all trading below Treasuries. The German one-, two- and three-year yields are all below zero and its 10-year is below 1%, nearly 150 bps below Treasuries. Finland, the Netherlands and Austria are all below 1.2%.

The U.S. housing market continues to look troublesome. Mortgage applications showed mortgage activity moving only slightly higher on lower interest rates week over week (composite index up 2.8% vs. 1.4% last week), but the manufacturing sector outlook continues to improve. Not only did durable orders in July climb nearly 23%, largely due to the a blockbuster month for Boeing (BA) in aircraft orders, but ISM's factory index for July hit a three-year high, with 17 of 18 industries reporting expansion and increases in both new orders and employment. We would note the durable orders data for July were not all peaches and cream given that orders for non-defense capital goods excluding aircraft, (the proxy for business investment) fell 0.5% in July. Taking the sting out was upward revision for June to 5.4% and we'd view the July dip as somewhat normal following the strong June showing.

Best Buy (BBY) shares slid almost 7% Tuesday. The company announced its same-store sales were down 2.7% year over year, worse than the decline of 2.2% forecast by analysts. Store traffic fell 4% as it is still losing out to the Internet. The company also issued a sobering view on the 2014 holiday, sales with comparable-store sales falling in the low-single digits year over year. While some of this reflects the tone of the consumer, with only 8% of its sales derived from online Best Buy is falling behind the powerful shift in how consumers shop.

To us, the comment from Best Buy CEO Hubert Joly sums it up: "Consumers are increasingly researching and buying online."

That was a huge confirmation point for our online shopping trifecta of Amazon (AMZN),Visa (V) and UPS (UPS) as we finish up the back-to-school selling season and get ready for the holiday onslaught in the coming months. Even though Amazon shares are up more than 18% from their May 8 lows, Versace continues to see the risk/reward as favorable through the end of the year, largely due to the seasonal pickup in the business and the continued shift in consumers toward online shopping. The same goes for Visa and UPS, which is benefiting from falling gas prices, now down year over year.

On the other side of the holiday sales equation, we see Best Buy's weaker-than-expected guidance, which comes on the heels of similar guidance from Macy's (M) and Target (TGT). Retailers weren't alone, though. Smith & Wesson (SWHC) also lowered its outlook for the year, pointing to high inventories following an earlier surge in buying.

We've regularly mentioned here the rising cost of food in our weekly piece here at the Street, but thought it particularly apropos as we head into the Labor Day weekend. According to survey data by Consumer Edge Research, last month 36% of high-income households, (defined as those earning more than $100,000 a year) said food prices are negatively impacting their overall spending habits, up from 20% in January. In July, beef prices were up 10% year over year, with butter up 17% and fresh fruits up 6%.

Hawkins, who considers chocolate to be a non-discretionary weekly (occasionally daily) food purchase, was horrified recently to hear that Nutella may find itself under pressure to raise prices with the recent near-doubling of hazelnut prices after the cold late winter and punishing frosts caused a bleak harvest in Turkey, the largest exporter of the luscious nut (Hawkins' description). Nutella, which is owned by the privately held Italian company Ferrero, buys about 25% of the world's hazelnuts, which could help insulate it as it owns Turkey's largest hazelnut processor.

The continued pressures felt by the cash-strapped consumer in the supermarket means we'll be looking at Friday's personal income and spending report for July rather closely to see if recent trends in disposable income and savings continue or not.

Look for more from us over the weekend in The Week Ahead.

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