This was a pretty important week for investors.
And oddly, it didn't feel like that. I don't know if that feeling is a derivative of investors getting a little complacent now that the market has resumed its bullish bias. Or maybe it is a result of the Fed reaffirming that it's a friend to investors the world over. But there was a ton of takeaways to consider this weekend from presentations by executives at investment banks to several big earnings releases to the resumption of deal activity.
Here are some brief takes on things that stood out to me.
1. The Dollar Is Weak Again
The U.S. Dollar Index dropped to a five-month low this week compliments of the Federal Reserve's dovish tone. Interestingly, so many execs are still talking as if the dollar is rallying and will remain a major impediment to top- and bottom-line growth this year. Take, for instance, Macy's (M) chairman and CEO Terry Lundgren, who said at a conference this week he doesn't anticipate the dollar's strength to halt this year. Hence, tourist spending at the company's properties may continue to be weak.
But with the dollar weakening, Macy's tourist locations may come alive this summer, which is a factor that is definitely not priced into the stock. Indeed, the dollar's weakness may unlock some earnings power that is not reflected in the 2016 outlooks provided by big companies to begin the year. I think this possibility for upside surprises, due to the dollar's weakness, could be seen in the 7% one-month gain in the Vanguard Mega Cap ETF (MGC). The way to play this, I believe, is through food companies such as General Mills (GIS), PepsiCo (PEP), Coca-Cola (KO) and Campbell Soup (CPB), which are benefiting from deflation, cost-cutting and new product innovations in the healthy category.
Beaten-up commodity plays have gotten a bid this week due to the reversal in the dollar. While they may have a short-term tailwind (thanks to the Fed), it will be hard to hold oil, gas and gold names into their brutal earnings reports next month. So keep in mind that looming risk.
2. The U.S. Consumer Is Scared
When McDonald's (MCD) goes on its run (and it has in the past) of pretty decent sales growth, I always start to wonder about the health of the U.S. economy. McDonald's basically sells the lowest-priced fast food around -- sure, packed restaurants in the morning may mean people are headed to work, but likely it means they are trying to ingest the most carbs for the least possible price.
I think McDonald's nailed its presentations to the banks this week. It gave investors things to be hopeful about (new loyalty program, focus on food and cost control) for the balance of the year. But it also reaffirmed that driving value right now is critical, which was a theme on display elsewhere this week. Wal-Mart (WMT) sounded rather cautious on the U.S. consumer during its presentation. Then we received an ugly downward revision to the January retail sales numbers. February's numbers weren't any great shakes either (online sales were sluggish, too).
Seeing these elements underscores the Fed remaining on heightened awareness to downside economic risk. Further, it leaves open the door to companies in many consumer-oriented sectors continuing their struggles from the holiday season into the first quarter. I think Finish Line (FINL) will report lackluster results next week and give a cautious outlook for the year. I dig the new CEO at the helm, but the business is going through a rough patch as consumers are focusing their purchases at Foot Locker (FL) and J.C. Penney (JCP). (Foot Locker is part of TheStreet's Trifecta Stocks portfolio.)
3. First-Quarter Earnings Season Will Be Confusing
I want to be excited about FedEx's (FDX) earnings results. The company saw some nice margin boosts from cheaper gas prices and ongoing cost-savings initiatives. Moreover, the top line didn't fall out of bed amid a cooling global economy. But seeing the company slash its 2016 GDP forecast was tough to stomach and underscored the cautious stance on the economy, UPS' (UPS) CFO articulated to me a couple of weeks ago on air. The GDP forecast suggests the second quarter may not have started off particularly robust, which runs counter to the upbeat mood among investors that has sent stocks higher from the lows.
Then there was Caterpillar's (CAT) big-time guidance reduction. Wow is all I have to say here -- this company never seems to get its guidance right. Nevertheless, the message on the global economy sent by Caterpillar wasn't warm and fuzzy.
In the end, here comes a confusing earnings season dotted by profit margins getting supported by share repurchases and deflation, but top-line momentum is nonexistent due to slowing economies. A premium on stock selection is vital.
4. Get Over Your Chipotle Stock Obsession
As I wrote on Thursday, Chipotle's (CMG) shares deserve a harsh re-rating by the market. The fan boys have to be shaken out of the name -- the company's fundamentals have changed, and will continue to change in a way that presents new previously unforeseen earnings risk. The stock plunging on Thursday reaffirms my assessment following the company's oddly upbeat investment bank presentation.
5. Quote of the Week
Under Armour (UA) founder and CEO Kevin Plank just gets it. Big fan of this guy -- frankly, could list at least 25 reasons why. In typical Plank fashion, he offered up a real-deal assessment -- this time on entrepreneurship. "Losing money is cultural," said Plank at South by Southwest, adding, "It's a habit -- if you get used to losing money, it's really hard to stop. If I have advice for an entrepreneur today, go out and find out if your product can sell." (Under Armour is part of TheStreet's Growth Seeker portfolio.)
Plank's comment is especially prescient given the fallout unfolding in the start-up and established tech worlds. Companies are going belly-up after once pie-in-the-sky products and services never come to fruition or fail to live up to expectations. Funding is being pulled. On the other end of the spectrum, Yahoo! (YHOO) shares are getting punished in part because of Tumblr basically being worthless due to a product that kind of has no useful purpose to society (other reasons in play, obviously). Twitter (TWTR) gets re-rated as its bottom line has stunk, with consumers being turned off by the product. (PepsiCo and Twitter are part of TheStreet's Action Alerts PLUS portfolio.)
I think the succinct takeaway from Plank is: If you are invested in tech right now, make sure the company is making money and recent acquisitions serve a purpose and have actual profits. If not, there could be painful lessons in the not-too-distant future.