Don't let the light economic release schedule throw you off the scent; this is a secretly critical week for a confused stock market.
Volatility has almost gotten out of hand early in 2015. The wild intraday swings in stock prices are emblematic of the never-ending ascent in program-trading that kicks into high gear whenever earnings season intensifies. What this is causing, in my humble opinion, is the undermining of the confidence in trading and longer-term investing.
How could the fundamental outlook for Tesla (TSLA), Facebook (FB) or other richly valued entity change seemingly every millisecond due to Swiss franc appreciation, prospects for an ECB QE maneuver, or comments on rate hikes by a second-tier Fed official?
Crazy stuff, and it perpetuates fear in the process. With that erosion in confidence comes the specter for another type of flash crash, perhaps one that is more severe across asset classes, and subsequently does more damage to investor portfolios.
Another element fueling the state of confusion regarding the market's short-term outlook is how stocks rose on Friday with a slight gain in oil prices. That was a move borne from folks being told the last several weeks that if oil rises, buy stocks. But, to me, it was an indication that stocks have not decoupled from headlines and fundamentals in the oil market. Given the strong probability that oil prices have not bottomed, stock prices could succumb to further selling pressure. I would look for oil prices to fall and for stocks to gain ground as a tell we are beyond the state of confusion for the market.
Earnings Stories to Watch
Earnings are likely to be dreadful for Coach (COH) as a result of a fiercely competitive holiday season in the female handbag and shoe markets. I think that view was solidified by Coach's pre-earnings report decision to plunk down considerable money to buy upscale retailer Stuart Weitzman, a tactic designed to mask underlying weakness in the core business.
Be mindful that a poor quarter from Coach does not mean to go out and scoop up shares of Michael Kors (KORS). Both companies were overly competitive on price this past holiday season. Given the excessive valuation on Michael Kors, investors stand to be negatively surprised by the company's profit margins (as has become a recurring theme on earnings day from the company).
COO and heir apparent to founder and CEO Howard Schultz announces that he is taking a prolonged break pre-earnings report. Hmm. Some execs at the company's Seattle HQ are being let go pre-earnings report. Hmm. The economy of China, where Starbucks (SBUX) is making a major store rollout push, is slowing. U.S. traffic growth to Starbucks restaurants has been moderating. I would sit out Starbucks into earnings. The outgoing COO will be on the earnings call along with Schultz to discuss management transition matters; it's important to receive the details on the transitions, and see if increased investments in holiday marketing and inventory reignited U.S. traffic, before buying the stock.
The quarter will be ugly, as will global January sales. I do not think you will learn of news that embattled CEO Don Thompson is leaving. For McDonald's (MCD) stock to start working again, the secret sauce has a simple recipe: U.S. comparable store sales declines have to stabilize as to suggest extensive investments in healthier food marketing and a build-your-own- burger platform are bearing fruit. Up to this point, McDonald's renewed marketing efforts and restaurant level changes have not only failed to appear in U.S. sales, but in the case of marketing have backfired a bit as to weigh on sales.
Odds & Ends
- Best get some decent earnings from American Express (AXP) and Discover (DFS). If not, it will only feed the disappointment over bank earnings and fear of lackluster consumer spending amid tepid wage growth.
- I would be analyzing sequential volume trends, by major line of business, within the earnings reports of Union Pacific (UNP) and Kansas City Southern (KSU) this week. Saw modest slowing in certain areas in the fourth quarter at CSX.