Calm has returned to the stock market, for now.
While Fed stalkers are prepared do what they do best this week -- obsess over every word in an FOMC statement -- it's good to keep in mind the governing body's rate decision is not the story of the week.
We already know that the Fed will be "patient" with its rate increases. None of the guidance shared by Janet Yellen at her final press conference of 2014 will change in this week's assessment of the economy from the Fed.
In fact, I would argue that the Fed could surprise a smidgeon on the dovish side. Consider this toxic concoction we have swallowed since Yellen last graced us with her presence:
- No wage growth in the December employment report.
- Higher geopolitical risks that imply depressed prices abroad for U.S. multinationals.
- Oddly weak December retail sales report.
- Homebuilders warning on demand in oil-dependent housing markets like Houston.
If you believe the Fed will guide to a rate increase at its third meeting of 2015 instead of the present expectation for the second gathering, as a means to ease fears on global growth and stay somewhat in tandem with the ECB, then being overweight equities is the way to go right now. But I think the most important ballgame in town will be earnings.
Generally, earnings season has been mixed at best. Alcoa (AA) did not drop a bomb on us in the form of a warning on its global demand outlook. But bank earnings have weak through and through and those of the cardholders have supported the message from the tepid December retail sales report (consumers remain cautious due to sluggish wage growth) rather than optimism on consumer spending from declining energy prices. We stand to inherit another round of mixed earnings if the comments from UPS (UPS) and McDonald's (MCD) were harbingers of what is coming down the pike.
Although I think the UPS earnings shortfall was mostly company-specific, the reality is the company invested in front of demand that never materialized. That paints a picture of a U.S. economy not being as healthy as the president and those hucksters involved in pitching stocks lead the common man to believe. What it also paints is a situation where companies may be flat out overvalued. The market may have bid up shares unjustly, essentially having fallen in love with the thesis that the U.S. economy is accelerating, which was passed around trading desks in late December.
Key Earnings Reports of the Week
DR Horton (DRH)/Whirlpool (WHR)/Sherwin-Williams (SHW)/Stanley Black & Decker (SWK)
I would be surprised if Whirlpool tosses up a bad quarter and ugly guidance, at the core (excluding currency). Appliance sales were strong at Best Buy (BBY) during the holidays, as well as at Home Depot (HD) and Lowe's (LOW), based on my checks. The risk to Whirlpool's outlook are largely currency related. The stories at DR Horton, Sherwin Williams and Stanley Black & Decker could be opposite Whirlpool, given their early cycle status.
Comments from homebuilders over the past two weeks have me concerned on the sales and margin trends at DR Horton and Sherwin Williams. The wildcard for a Sherwin Williams is benefit from lower raw material costs. Stanley Black & Decker's numbers could be weighed down by its industrial exposure in the EU and, naturally, currency headwinds.
Coach (COH)/Procter & Gamble (PG)/Brinker International (EAT)/Hershey (HSY)/Decker's Outdoor (DECK)/Hanesbrands (HBI)
Coach's earnings will be bad and the conference call is likely to reaffirm the deep challenges the company continues to face in regaining its relevance amongst consumers. Kimberly-Clark (KMB) lost market share in many categories to Procter & Gamble in 2014 (notably diapers) and that has me intrigued on the quarter from Procter. I am using Decker's Outdoors' quarter as a tell on VF Corp's (VFC) earnings. The non-snowy winter could have dented demand for Uggs and North Face jackets. I saw evidence of this via a pickup in discounting on each brands throughout December.
Brinker International, owner of Chili's and other chains, has rode a hot share price in the past month due to the decline in gas prices putting more money into the pockets of the hungry middle class. I think that has people spending not only on dinner at Chili's, but also on alcohol and dessert. Inflation has also stabilized. Brinker has to beat nicely in order to support its investment thesis (and that of the restaurant sector at large).
Cotton prices have plunged in three-month's time and that will be a major tailwind to Hanesbrands' performance in 2015. More cash in the hands of the poor shopping the aisles of Wal-Mart (WMT) plus the decline in cotton prices are a win for the undergarment maker.
So far, so good on my Apple call.
To remain bullish, I want to see two things. First, how the gross margins on the iPhone 6 and iPhone 6+ influenced the overall business, as it could provide valuable insight into the looming impact of the Apple Watch. Second, was Apple able to beat wild analyst forecasts for demand on its new phones? If so, it could lead to a material raise in EPS estimates by the Street to account for similarly robust demand for new hardware releases later this year.